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Common Sense and Law about Credit Cards

The leading cause of bankruptcy in the United States is credit card defaults. Many advertisements and sales pitches by implication, if not outright exhortation, encourage customers to run up big balances, as big balances make for high profits! Of course, access to credit can be desirable, but it must be used wisely. Unfortunately, creditors often do not stress the prudent use of credit when marketing credit cards.

Here are some helpful hints on using, but not abusing, credit cards:

1. Avoid Too Many Cards. Most experts advise that two credit cards are enough. When under stress, access to too much credit can be like a drug. When choosing credit cards, select only the ones that best meet your own needs.

2. Beware of Solicitations. Receiving numerous credit card solicitations in the mail each month does not mean that you can actually afford more credit. Many of these applications are sent by lenders looking for customers who will run up big balances, as big spenders pay more interest. Contrary to the pitch on the offers you receive, you may not have been singled out because of your excellent credit rating, but because the lender thinks, due to your past spending habits, it can make more money off you. Indeed, many lenders solicit credit card applications based not on your income or your credit record, but instead on marketing profiles, such as whether you have succumbed to the video home shopping craze, what stores you shop at, what magazines you subscribe to, or even your zipcode.

3. Consider the Credit Terms Carefully. The interest rate is important and you should always try to keep that as low as possible, but it is not the only consideration. Lenders can easily change the rate on your cards, with or without a reason. If you pay off your balance regularly at the end of the each month, other credit terms that add to the cost of the card may actually be more important than the rate, such as annual fees, late charges, memberships fees, or ways of calculating the balance.

4. Read the Entire Solicitation. Most credit card solicitations contain both a "sales pitch" and, usually on the back of one of the pages of the sales pitch and in small print, a disclosure of the actual terms of the credit card. Don't be embarrassed if when reading these terms you can't understand them. If you don't understand the terms, call the lender and get an explanation before you accept the card. If you don't like the explanation, don't take the card.

5. Reject "Teaser" Rates. Many lenders offer artificially low "teaser" rates that last only for a few months, after which the rate can greatly increase. The "teaser" rate may look good, but the real question is often what happens when that "teaser" rate expires.

6. Be Careful of Variable Rates. Variable interest rates are difficult for even accountants and attorneys to understand and project, let alone the average consumer. If you don't understand the variable rate language, it may be advisable to avoid that card. In addition to being confusing, some variable rate formulae conceal significant and not always obvious disadvantages.

7. Watch Out for Late Payment Charges and Penalty Rates. Even a card with an excellent rate of interest can turn into a nightmare when you miss a payment. Late charges can be significant. Even more significant than late charges is the fact that many lenders reserve the right to dramatically raise your rate of interest if you miss even a single payment. If you are having financial problems, these terms can have a significant effect on your ability to work your way out of debt.

8. Do You Have a Grace Period? Some credit cards have a grace period, usually 25 days, running from the date of the monthly billing statement, during which you can pay off the balance in full and avoid further finance charges. Not all cards have grace periods, and not all cards have the same grace period. Also, keep in mind that just because you mail in your credit card payment today, does not mean it will be received and credited tomorrow.

9. Make More Than Minimum Payments. Consumers, sometimes as a result of lack of income, sometimes because of neglect and inadvertence, frequently make only the minimum payments. Because of the relatively high rate on credit cards, this only compounds their financial problems. One thing many customers do not realize is that minimum payments may increase. Indeed, lenders frequently retain the unilateral option to increase minimum payments and frequently do so when the customer's finances looks shaky.

10. Beware of Ancillary Solicitations. Once you receive your card, the lender or its affiliates are likely to send you all manner of solicitations for extra services, such as life and disability insurance, credit card protection, travel clubs, and similar offers. They are almost always bad deals.

Take card protection for example. Federal law limits your liability for unauthorized use of card to $50. Do you really need to spend $40 to $60 a year for protection already afforded by law? Life and disability insurance can be purchased from mainstream insurers, often at a better price. Unless you are a truly ardent globetrotter, travel clubs will not save you much, if any, money.

11. Keep Priorities Straight. If you are having financial problems, decide what payments come first. A good rule of thumb is that you should pay for necessities, such as food, clothing and shelter, first. Your home is more important than your credit card. Beware of credit cards in which the lender reserves a security interest in the equity of your home. A home is the single most valuable asset to most people will ever obtain, and, as a general rule, it should be the very last thing you pledge as security for a debt, no matter how desperate you are.

12. Avoid Jumping From Card to Card for Teaser Rates. Many people are under the impression that they can save money by simply skipping from card to card to take advantage of teaser rates. However, if your timing is off, you can wind up buried in financial mud. Remember, lenders don't make their money on teaser rates, they make their money when the borrower loses track of rate changes, lets the teaser rate expire, and gets locked into a higher rate.

13. Consider Cancellation. There is no law that says you have to keep using a card that you don't like. You may cancel a credit card at any time (although you are still liable for the unpaid balance of the card). Perhaps if more people canceled cards with terms they didn't like, those terms would disappear? It is not unknown for lenders to lower rates or remove onerous terms to compete with competitors or retain customers.

14. Keep Your Lifestyle Affordable. Don't use credit cards to pay for a lifestyle you can't afford -- no one can live forever on borrowed money. Avoid using credit cards to get out of financial problems; it seldom works. Be suspicious of unsolicited offers to increase your credit limit. Make more than the minimum payments. Interest only payments will cause your debt to skyrocket.

15. Know Your Rights In A Dispute. The Federal Truth-In-Lending Act provides a mechanism for disputing incorrect credit card bills. Instructions usually appear on the back of each monthly billing statement. Failure by the lender to comply with these procedures may result in stiff penalties. Upon receipt of your notice of dispute, the lender must investigate the charge and report back to you. If the merchant cannot or does not substantiate the claim, it will be removed from your bill, along with associated interest.

During the pendency of the investigation, you usually cannot be required to pay the disputed bill or the interest accruing thereon, however, you must pay that portion of the bill which is not in dispute. Also, you may not be reported as delinquent during the pendency of the dispute.

These tips can help turn credit cards into a benefit, not a detriment, for you and your family.

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