Not all credit cards (or loans) are created equal. Many contain hidden fees. Some cards have low rates but no grace period. Many cards have a grace period but charge a much higher rate of interest. Many dealer-financed auto loans charge a higher rate of interest than what they advertise by using hidden fees. Lenders often take advantage of borrowers' lack of knowledge regarding credit matters.
When selecting a credit card, the first consideration is the condition of your credit history. If you have a bad credit history, you may be limited in the number of credit cards you can obtain. If you have a good credit history, or if you successfully re-build your credit history, you will probably be able to choose from a wider universe of credit card issuers. A credit card should match your lifestyle. For example, if you pay off your credit card balances every month, look for a credit card with a grace period and no annual fee. A "grace period" implies that the credit card issuer does not charge you any interest for a given period of time, usually twenty-five days. This means that if you pay when you receive your bill, you will not pay any interest on your purchase. The grace period is not necessarily twenty-five days; it depends on the cycle of your bills. The credit card company usually allows twenty-five days from the last date of your cycle, so if you buy something near the beginning of your billing cycle, you may not have to pay for a much longer time. For example, if your billing cycle is from the first of the month to the last day of the month and your bill is due on the twenty-fifth of the month, a purchase made on the first would not have to be paid for one month and twenty-five days. Look in appendix C for a complete listing of larger credit card issuers and their terms. Chapter 13 also goes into credit cards in greater depth.
Auto loans are another form of credit to be very wary of, especially dealer-financed loans. Often improperly disclosed, Rule of 78 loans charge interest up-front, making total payments much higher than those of a conventional auto loan. Although this is often the only kind of loan offered to someone with negative credit, it is much more expensive than a traditional loan. A 10 percent rate on a Rule of 78 loans, for example, could be equivalent to a 16 percent rate on a regular declining balance auto loan. Beware!
The following are some of the best and worst buys in credit.
Best buys
- For those who carry credit balances, Wachovia Card Services.11.40 percent Variable Interest Visa or Mastercard.
- For those who pay their balances in full, USAA Federal Savings 13.70 percent Variable Rate Visa or Mastercard. (For more complete information on credit card issuer.
- Discover Card. No fees; rebates; accepted by more and more merchants.
- Department store cards. Usually no fees; liberal credit lines; often among the easiest to obtain.
- Owner-financed mortgages. No points; low interest rates; but get a good real estate lawyer before signing.
- Auto loans with a down payment. 20 percent down gets you much more attractive terms than 100 percent financing. The interest savings can be substantial.
Worst buys
- American Express. Why pay large annual fees for somewhat dubious status?
- High-interest, high-fee Visa or Mastercards. Unless you have no other options, shop around.
- Credit balance insurance. Why bother? Buy a term life policy from an agent and pocket the savings.
- Rule of 78 auto financing.
This is just a partial list. Later chapters go into more depth on different kinds of credit the key to managing your debt is self-control. Resist the temptation to buy on a whim. Plan your credit purchases carefully and you'll probably never have to worry about not being able to pay your bills.
Never get into the habit of paying for perishables with debt. Constantly charging dining and entertainment and then making monthly payments, or using one credit card to pay the payments on another, will definitely lead you to disaster. Using credit to finance such durable goods as cars, houses, and furniture while planning how to retire the debt is a far more prudent path. Spend a few hours a month planning your finances, including your credit. Set your financial goals and use all your resources to accomplish them.
Even if your financial situation is grave, it is still not too late to develop a strategy. Your strategy, however, may be slightly different.
