Financial Advice Blog

Credit card offers a number of benefits. They give us easy access to credit in emergencies. They make it easy to pay for the things we need and want. And when used responsibly, they can build up our credit. But they can also be very expensive, especially when we have to pay penalties.

Credit card companies issue penalties in various forms. These include:

* Late fees – When we’re late paying our phone bills or electric bills, the company often tacks a late fee onto our next bill. The same holds true for credit card companies. The difference is that the fees from credit card companies are usually much, much higher. It’s not unusual for them to charge late fees of up to $39.

* Overlimit fees – Most credit card providers will not allow debtors to charge purchases in excess of their credit limits. But if your card is maxed out, interest charges could push your balance over the limit. For each month your balance transfer is over the limit, the creditor can impose an overlimit fee.

* Penalty interest – Most credit card contracts include a provision that allows the company to raise your interest rate if you are late with your payment. In most cases, interest will not be raised until you’re late twice in a 6- to 12-month period. But the default rates are often two to three times your normal interest rate.

* Universal default – A growing number of credit card companies are raising interest rates for customers who are late with payments not only to them, but to other creditors. This is called a universal default rate. Even if you pay your credit card bill on time every month, a misstep on another debt could result in a rate hike.

* NSF fees – If you make a payment and it doesn’t clear your bank, your credit card company can add a non-sufficient funds fee to your bill. This is in addition to late payment and overlimit fees that may result from the denied payment.

* Annual fees – An annual fee isn’t technically a penalty, but it is something to watch out for when you apply for a card. Some creditors charge annual fees of $50, $75 or $100 or more. There are plenty of cards out there without annual fees, so in most cases it’s best to just pass the ones that do charge them by.

Knowing the Penalties for Your Credit Cards

Credit card issuers are required to disclose all penalties and fees that are or could be charged on credit applications. They may also send a copy of this information to new cardholders. And this information should also be provided on each credit card statement. You will have to read the fine print, but creditors are required by law to provide this information.

If you incur a penalty, you may be able to get it reversed. If it’s the first time you’ve been late with a payment or a bank error has occurred, a call to the credit card company may resolve the issue. But if you habitually make late payments or exceed your credit limit, the creditor is unlikely to be helpful.

Penalties can cost you a great deal of money. Whether they’re one-time fees or interest rate increases, they can eventually add hundreds or thousands of dollars to your balance transfer for 6 months. Paying attention to these fees and making a conscious effort to avoid them will enable you to pay off your balance much sooner and allow you to keep more of your hard-earned money.

Undoubtedly, your children have seen you use a credit or debit card when you shop and wanted to know about them.  Explaining the difference between credit and debit cards and their function will take some time, as well as a few tools to illustrate their use.

Probably the best way to explain what each card is for is to demonstrate by using visual tools.  For example, take out a debit card and a credit card.  Use a label or scotch tape a piece of paper to each one identifying what they are.

Now you can effectively show your children what they are used for.  Make a game of it.  Place a few grocery items on the kitchen table.  Pretend that you are buying them and paying for them with a debit card.  Explain the process to the children in ways they can understand.  Repeat the same process with a credit card. 

When you go out shopping and you proceed to pay a bill, do you immediately take out the cash you have on hand or pay with a credit card?  This may seem like a silly question, but there is psychological evidence that suggests many individuals become emotionally attached to their cash.

According to Live Science, “A four-part study found what many financial planners already knew:  People spend more money when using credit cards compared to cash purchases.  People also spend less when they look at their expenses in detail, the researchers found.”

Before we pass on the actual results of the study that was performed by New York University and was written in the Journal of Experimental Psychology’s September issue, let’s explore for a moment the psychology of money.