Credit
Card Lingo
by Ethan Hunter
Knowing What’s Out There – And What To
Choose
The World of finance can be a tricky
game for both the seasoned veteran and the novice borrower. Banks can –
by accident or design – make even the most simple information seem
complicated and through this unwittingly (or not) induce their
customers to go for products that might not be best suited to their
needs.
Credit, charge, ATM and debit cards
are not all alike. Although you might think that they are basically the
same thing – a way of making payment for purchases or means of getting
cash – they are actually quite different. So as to use these cards
wisely, you should know what each one is and how it differs from the
others. Here’s some information to help you choose wisely.
Credit Cards
Credit cards can be a great way of
paying for a purchase. They are easy to apply for, easy to use, and
flexible in their repayment options. However, if you carry a balance,
credit cards can be like very expensive loans.
A credit card works like this: the
credit card company supplies you with a card; you use that card to pay
for items and services up to a certain total amount -- your credit
‘limit.’ The store or service provider then collects what you owe from
the card issuer, whom you repay. You're then allowed to pay off as much
or almost as little as you like off the balance each month, so long as
you pay a minimum amount each time (usually 2.5 per cent).
On the outstanding balance you’re
charged interest (which can be as high as 25% or more each year) at the
end of each monthly period, unless you pay the full balance each time
your bill arrives.
Credit cards are immensely profitable
for issuers for a variety of reasons. The high rate of interest yields
issuing banks and companies vast profits – in some cases the bulk of an
institution’s earnings. In addition to the interest, many companies
charge an annual membership fee for a credit card, as well as a
plethora of other charges, including late fees, over-the-limit fees and
other miscellaneous charges. Companies also profit by charging stores a
fee each time a customer uses a credit card in their establishment.
There are three different types of
credit card available:
Unsecured Credit Cards
These cards are commonly made
available to those with good credit history and credit score. These
cards require no bank deposit amounts to secure and usually have no
annual fees and low rate of interest.
Higher Risk Credit Cards
These cards are usually given to
people who have a lower paying job, and/or poor credit history and
credit score. Often these cards charge an activation fee, and also
usually charge an annual fee of up to $80.
Secured Credit Cards
These cards are given to people who
have a lower paying job, and/or a very poor credit history and credit
score. Often these cards require a deposit to be made to the lender,
sometimes as much as near or equal to the amount of credit available on
the card. If the borrower can prove their credit worthiness over time,
that credit limit is then upped. These cards also attract a high annual
fee of up to $100 and charge high rates of interest. Charge Cards
Charge cards (also known as travel and
entertainment cards) are slightly from credit cards. The most famous
charge cards, such as American Express and Diners Club, have an
unlimited credit limit. Normally you can charge as much as you like,
but you are required to pay off your balance in full when your bill
arrives.
There’s one exception to this: If you
charge air fare, cruise fees or hotel charges booked through a travel
agent on an American Express card, you have an option to pay off your
balance over 36 months. There’s a sting in the tail, however: you'll be
charged around 20 per cent interest and will have to make minimum
monthly payments of $20.
The way charge card companies like
American Express make their profits is by charging very high annual
fees – up to $100 – and by hitting merchants with relatively high
charges each time a customer pays using their card.
If you don't pay your charge card bill
in full (unless the charges are travel expenses on an American Express
card), you'll get a one-month period of grace, when no interest is
charged. Beyond that, however, you'll be charged interest, which weighs
in at about 18 per cent. After about three months, if your account is
still not settled, your account will be closed and your bill sent to
the collections department.
Cash Advances
Some people use their credit or charge
cards to obtain cash advances. This can be an expensive way of
accessing cash. Most banks charge a transaction fee that can be as much
as 4% for taking a cash advance. Interest is also charged from the date
the cash advance is posted, even if it’s paid back in full when your
bill arrives. Moreover, the interest rate is usually higher on cash
advances than on ordinary credit card charges.
ATM & Debit Cards ATM and debit
cards offer most of the same functions as credit and charge cards, but
the crucial difference is that the money comes out of your bank account
straight away. If you don’t have the money, you can’t buy the product.
For some people this is a preferable
option: they like to keep track of their outgoings, to keep tabs on
what they’ve spent, to avoid any sort of debt – no matter how brief.
There are disadvantages to using debit
cards. It doesn’t give you the option of up to a month to settle your
statement. You also don't have the right to withhold payment with a
debit card (the money is immediately removed from the account) in the
event of a dispute with the merchant over the goods or services paid
for. Some banks and merchants also charge transaction fees for the use
of debit cards.
Ethan Hunter may be contacted at or ethan@ajhacking.com
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