What Credit Cards Really Cost

It is indeed an irony that the credit card companies hold the card holders responsible for the exorbitant yearly fees and interest rates. They want us to believe that the annual fees on credit cards and the rate of interest on credit purchase are awfully high merely because the consumer is stupid and they simply don't make purchases at inexpensive credit rates.

However, the fact is far from what the credit card companies want us to swallow. The truth is that the attractive advertisements printed by the credit card companies to lure people to acquire their plastic money seldom provide us with the information that the prospective customers require to make a coherent decision regarding the credit card they should actually possess. In fact, the promotional hardly give us any opportunity to make the right choice of credit card.

Honestly speaking, no credit card company ever makes any mention of the yearly fees, interest charges, interest on loans or credit advances, late fines, penalty on spending beyond limit, fees charged for closing an account, charges on mounted fees and so on in their beautifully designed and attractive advertisements soliciting people to get their plastic money. The fact remains that none of the credit card companies want to reveal the actual costs of possessing or using their credit cards to prospective customers. It was only in 1988, when the United States Congress representative from New York, Charles Schumer presented and passed a Bill making it mandatory for all credit card companies to include what is known as the 'Schumer Box' on their advertisements asking people to take their credit cards as well as the application forms for the plastic money that most of the firms began disclosing the annual fees, interest charge and some other important details regarding using their plastic money. This indeed was a rare incident, but to some extent, helped the consumers to find out what they would be required to spend to own and use credit cards of different companies even before applying for one. Nevertheless, still no credit card company came out with the complete details.

It is very simple to gauge the dilemma of a prospective credit card holder prior to the introduction of the 'Schumer Box'. It is anyone's guess as to how a prospective credit card customer would have evaluated the costs of possessing and using credit cards issued by different companies when there was no information available about anyone. However, the credit card companies preferred the way things were then as it helped to enhance their profits limitlessly. This is the primary reason why the credit card lobby put up a stiff resistance to the Bill introduced by the New York Congressman Charles Schumer. The credit card companies were determined to foil Schumer's efforts to make the credit card companies liable for disclosing the details related to possessing and using their respective plastic money.

Earlier, the system was that the credit card company would disclose the costs of possessing and using its plastic money to the customer only after his or her application for a credit card had been accepted by them. Even then, the information would have been provided to the customer in small parts that were virtually not legible. Any layman can say that it was always too late to evaluate the benefits of possessing and using credit cards of different companies once the application of the customer had already been approved by a particular credit card company. It was only for this reason that the credit card companies preferred the state of affairs prevailing before Charles Schumer succeeded in passing the Bill introduced by him in the U.S. Congress.

The fact is that before the Schumer Bill was passed by the U.S. Congress even if you wanted to find out how much it would cost to possess and use the credit card of a particular company, you would never be able to find the fact despite your best efforts. It was almost impossible to do so even if you called up the customer service department of any credit card issuing company. In fact, the customer service personnel who would be answering your call themselves would not be aware of the answers to your questions regarding the expenses involved with using the credit card of their company. And even if they were aware of the answers, they would have been instructed by their authorities not to respond to such questions.

It is really unfortunate that despite the presence of the Schumer Box or the legislation making it mandatory for credit card companies to disclose the costs of possessing and using their plastic money in all their marketing advertisements as well as the application forms, the credit card companies are still reluctant to follow the guidelines. In fact, they are always searching for and finding ways and means to evade revealing the cost of their cards, including those that have been specifically mentioned in the Schumer Box. For instance, several advertisements aimed at luring people to obtain pre-approved cards highly publicize their 'low, low' preliminary interest fees of approximately 5.0 per cent. However, most of these advertisements do not make any mention of what the new or higher interest rates would be charged once the introductory rates end. In fact, the credit card companies are always making efforts to conceal the fact that once the low introductory interest rate ends after a few months of obtaining the plastic money, they charge the customers exorbitant annual interest rates varying between 19 and 21 per cent and this can never be termed as a good bargain for the consumer.

So, the pertinent question here is how much it exactly costs an individual to possess a credit card. One thing is for sure and that is it costs much more than what you may be thinking. There are basically five important aspects that establish the cost of a credit card for you. And they are as follows:

  • Annual fee
  • Interest rates on credit purchases
  • Grace period or free-ride period
  • Cash advance (loan), penalty for late payment, spending beyond limit and interest rates
  • The manner in which interest rates on purchases are reckoned

Annual fees

The annual or yearly fees are the primary as well as the most obvious expense you have to bear for having a credit card. In fact, it is interesting to note that the services provided by the credit cards that charge the maximum annual fees are more or less same as the services provided by the credit cards that have a lower or inexpensive yearly fee or the ones that do not charge any annual fee at all. Actually, all these credit cards enable their customers to make credit purchases at several or virtually unlimited, places in the United States as well as in the different parts of the world.

What is really surprising is the fact that at times services offered by the credit cards charging the highest annual fee do not match up to the benefits or facilities provided by the comparatively inexpensive plastic money. For instance, though the Diners Club and American Express credit cards charge hefty annual fees, they are not accepted by most of the stores and restaurants in comparison to the relatively much cheaper Visa and MasterCard. This holds true in the United States as well as in any other region of the world. The primary reason behind very few stores and restaurants accepting the Diners Club and Amex cards is that these credit card companies charge hefty commissions from the stores and restaurants for every credit purchase made with their cards. On the contrary, accepting the bank cards, which are used widely, costs much less to the stores and restaurants. Hence, it is clear that while the less expensive places accept the relatively cheaper bank cards, the Amex and Diners cards are accepted at more posh places that are able to afford the commissions charged by these high profile cards.

Interest rates

It is surprising to note that most people are not aware of the fact that the interest charges on credit cards vary from one issuer to another. And even if they are aware of this fact, they think that the difference in the rates is negligible. For instance, many people are of the view that the interest rates on Visa or MasterCard issued by different banks are same. This is far from the truth, as each bank enjoys the privilege to fix their own terms and conditions suiting their individual requirements. Hence, the interest rates as well as other benefits offered by Visa and MasterCard issued by different banks vary, often greatly. While the interest rates on credit purchases made with some cards are comparatively minimal, others may charge ridiculously hefty rates.

It is not that there is a disparity only the interest rates on credit cards issued by different banks. In fact, even the manner in which the different banks calculate the interest rates on their credit cards also vary greatly. While shopping for a credit card, you may find that the interest rates on credit cards issued by some banks as well as the manner in which they figure out the rates are quite affordable for you. On the other hand, there are some banks which adopt several smart ways to fleece their customers. Hence, if you are aware of what you need to seek, you may save considerable sums for you. However, if you are not sure what to search for, it is possible that your bank account will be affected. And this will surely make some of the credit card companies too pleased.

Understanding the credit card interest rates may be difficult for the common man. However, the interest charges on credit card usage may be figured out in a number of easy as well as complicated ways. In fact, the banks issuing these credit cards have spent a lot of money and time in creating the complicated or not-so-easy ways and are continuously striving to make them even more perplexing to the customers. The reasons behind such actions on the part of the bankers is to deceive their customers, maintain high levels of profits as well as keep the customer perplexed. Frankly speaking, customers who fail to comprehend the state of affairs or do not make any endeavor to understand what is happening are easy preys of the bankers' designs and get fleeced more easily.

It is true that the banks have made the calculation of interest rates on the use of credit cards so complicated that even many employees of these banks fail to comprehend the process. Ironically, this is truer with the people who are placed in the customer service departments of the banks to answer the queries of the credit card holders. Therefore, it is not surprising that when these customer support personnel themselves do not understand the process of calculating the interest on their respective bank's credit cards, they can offer little or no help to the customers.

The fact remains that the banks prefer the way things are moving at present and do not wish to make any changes to make the computing of interest on their credit cards simpler. Most of the banks utilize a minimum of six different procedures to charge the interest on your credit cards. It would indeed have been much better if all credit card companies and banks used a single method to calculate the interest on plastic money making it easier for the customers to learn the process as well as be able to undertake an evaluation of the different credit cards vis-à-vis one another. In fact, there is no explanation why the U.S. Congress or the Federal Reserve Board should not adopt a universal and comprehensible method to calculate the interest charges on different credit cards and make it mandatory for all credit card companies and banks to follow the procedure.

However, such a situation still appears to be a distant dream for the customers. While keeping the consumers confused vis-à-vis computing the interest charges on credit cards only adds to the profits of the credit card companies, it needs to be mentioned here that the credit card lobby has considerable influence both on the Fed as well as the U.S. Congress. Although the Federal Reserve Board should initiate some action in this regard, it is yet to concentrate on or give adequate importance to the issue.

Things are now getting worse for the customers as the credit card companies are now making use of computers to make it even more difficult to find out the interest charges for using their cards. Prior to the use of computers to calculate the interest rates on the credit cards, to some extent it was simple to calculate the interest charges. In fact, the credit card companies were virtually compelled to introduce computers to calculate the interest charges on their cards, or else their own employees were not in a position to work out all the scheming required calculating the interest on the accounts of the card holders. Presently, the computers reckon the interest on the card holders' accounts in the split of a second making use of techniques that would take an ordinary bank clerk several days or months to work out the same calculation with a simple adding machine.

As per the stipulations of the federal law, it is mandatory for the credit card companies to clearly mention the interest rate on the front of all the bills they send to the card holders. According to the law, the credit card companies are required to mention two interest rates - the annual cut rate or the yearly fee as well as the periodic rate to the customers in all the bills sent to their customers. It needs to be clarified here that the periodic rate is the monthly rate, as usually the customers are sent their bills every month. These two interest rates are basically the same with the only difference being that they are calculated over dissimilar periods of time.

Grace periods or moratorium

In simple words, grace period, also known as moratorium, is the extra time allotted to a person for making a payment. In terms of credit cards, grace period denotes the time allotted by a credit card company to the customer to make his or her payments for the purchases made with their card without having to cough up any interest on the credit purchase. Normally, a credit card holder has 25 to 30 days' time to make full payments for the purchases made by him or her without having to pay any interest on the balance. In fact, the grace period is not a law, but a convention that has its origin in the manner the merchants operated and many still operate the affairs of their store chain. Even before the advent of the plastic money, merchants allowed customers buying from their stores to put their purchases 'on account'. In other words, the merchants enabled their customers to make purchases on credit and provided them with a month's time to make the payments after sending the bills.

During the initial days of the credit card, the credit card companies pursued the traditional policy of the stores vis-à-vis making payments for credit purchases. In a way, the credit card companies were compelled to adopt the policy as they had to compete with the stores that allowed the customers to make purchases on credit. Now, having established their dominance in the economic market, the credit card companies would want to withdraw the grace period or free-ride period (as known in the credit card industry) facility they have been offering their customers thus far. In fact, now the credit card companies would want the customers to pay interests on the credit purchases right from the day they buy something with their card till the payment has been made in full.

A number of banks have in fact been brave enough to already implement the interest plan disguised as 'lesser interest rates' or 'a lower yearly fee' in their credit card advertisements. Such smokescreens have been essential for the credit card companies to prevent their infuriated customers from looking for other credit card companies that offer better benefits. However, happily enough, the tradition of the grace period has continued to exist in the banking industry. There is little doubt that eliminating the grace period would eventually affect the customers adversely. It may be mentioned here that when the banks launched the credit cards, they advertised them as 'free of cost' provided the consumers made their full and final payments within the stipulated grace period. These advertisements actually aimed at getting more customers and once the credit card companies had established their foothold in the financial market, they began to tax the customers with additional charges in the form of annual fees and other expenses. Now a time has come when the credit card companies want to do away even with the grace period with a view to multiply their profits by making the consumer pay interest all the time.

A number of banks and even merchants have lately adopted policy that is between keeping the grace period and getting rid of it. They have maintained the tradition of grace period, but do away with it totally if the consumer fails to repay the balance amount on his or her account in full prior to the expiry of the grace period. In other words, this means that if the consumer does not pay the full balance on his or her account every month, they will be required to pay interest on all purchases made with the credit cards right from day one. And this even means that the consumer has to make complete reimbursement of things purchased with credit cards within the month following the receipt of the bill from the credit card companies.

What is worse is that in the event of the consumer failing to pay or clear the entire balance due on his or her account of the preceding month they will possibly be required to pay interest on all the credit purchases made by them with the credit card during the previous as well as the current month. Hence, a credit card holder's failure to pay in full the balance due on his or her account is a very pricey, and often dangerous, way of living. Although it is true that the billing procedure adopted by the different credit card companies is in no way rational or a just policy, now nearly each and every credit card company is doing this. Therefore, the consumers are now actually trapped in a situation where the banks and credit card companies have removed the traditional grace period if they continue to make use of the credit or store cards for making their purchases.

There is even more bad news for the credit card holders as very soon the card issuing companies and store owners will make them pay interest on purchases which they are yet to make with their plastic money. If this really happens, no doubt it will be an atrocious step by the credit card companies and the merchants.

Hypothetically, even the travel and entertainment (T&E) card companies offer their customers a grace period of anything between 25 and 30 days. However, in reality, the customer must be able to pay the balance due on their account within the grace period or face the penalty of losing his or her credit card. In the case of the travel and entertainment (T&E) card it is somewhat possible to extend the grace period a wee bit, for the T&E companies usually do impose any interest or late fee on their customers unless they overrun the permissible period to make the full payment of the balance due on their accounts much after the stipulated 30 days. Nevertheless, if a customer fails to pay balance due his or her account too frequently, even the T&E companies will be disappointed and they will receive fees with interest charges. If this continues for some time, the consumers may even lose their plastic money with the T&E companies.

Cash advances

Many people often want to know what a cash advance is vis-à-vis the credit cards. In simple words, a cash advance is much like a loan. And when it comes to cash advances in respect to credit cards, the banks advertise it as an uncomplicated manner to obtain cash anywhere in the world on the plastic money issued by them. It is true that cash advances are usually unfussy, but they are certainly not free of cost. At any rate, they are not so in the United States. However, elsewhere the scenario is completely different. Outside the United States, several credit card companies are frantically determined to search for new ways and means to increase their proceeds from credit purchases made overseas. Interestingly, these companies are also be successful in their endeavor.

Many people are of the view that obtaining a cash advance on a credit card is similar to charging cash. But it is a wrong notion, as cash advances on a credit card are something similar to obtaining a cash loan from a bank. This is the primary reason why credit cards like the Amex from American Express or any travel and travel and entertainment (T&E) card, which are basically not credit cards issued by any bank, are unable to offer their customers a cash advance.

There are numerous people who still cannot differentiate between charging cash and obtaining a loan. In the event of a consumer charging cash, he or she would have received a cash advance and would be expected to repay the amount within the stipulated grace period of around 25 days after receiving the bill from the credit card company. If the consumer is able to clear the bill within the grace period, he or she is not required to pay any interest on the cash advance. On the contrary, if an individual obtains a loan, he or she is required to pay interest on the amount from the very first day of availing the cash.

On the other hand, a cash advance functions is an entirely different manner where the consumer does not avail the benefit of any grace period. When a consumer avails a cash advance, normally there is no way in which he or she can afford to evade coughing up interest on the amount. However, the expense for availing a cash advance is really hard to comprehend.

This is basically owing to the fact that the manner in which the credit card issuing banks usually calculates the interest on the cash advances in extremely complex. In fact, when the credit cards were initially launched sometime around 1972, some banks had advertised them as plastic money without any fees, cash advance with grace period and without any interest charges. However, this was something that happened long ago when the credit card companies and banks offered their customers a notice much before their grace period expired and when interest was due on their cash advance. Although these happy days exist no more, they continue to hang around puzzling numerous people's observation of the prevailing state of affairs.

Going by the happenings in the credit card industry, further bad news await the card holders, especially those seeking cash advance. It is very likely that when a consumer avails a cash advance, he or she may be required to pay interest on all things they purchase on credit with the cards, even if many of those items were normally free of interest charges. Although this may seem to be incredible, the fact remains that a number of extremely frugal banks do away with the interest free grace period when a consumer has a cash advance balance due on his or her account. In the event of making too many credit purchases with the cards, this may prove to be too expensive for the consumer.

The above discussions will help you to realize that the credit card you may be possessing is not too dependable at all. For instance, just approach a bank, apart from the one that had issued you the credit card you use, and ask the teller for a $100 cash advance on your existing credit card and try to find out what takes place and what it will cost you to obtain the $100 dollar cash advance.

As a rule, the bank that will pay you the cash advance should not charge any amount from you for the loan despite the fact that you don't possess a credit card issued by that bank. That means that if you ask for a $100 cash advance, you should get precisely $100 and nothing less. Actually, as per the bank's agreement with Visa or MasterCard, they are not allowed to make any deductions from your money. Instead, the bank giving you the cash advance will receive a commission from the bank that issued you the credit card.

However, barring a few, the bank that has issued you the credit card will not offer your anything or do anything for you without charging you, especially when you avail a cash advance. The bank that issued the credit card will charge you an exorbitant rate of interest on the money, right from the day the bank giving you the cash advance sends its bill for the money paid to you to your bank's clearing house. Contrarily, as per the initial promise of the bank, the cash advance should have been interest free during the grace period.

It is unfortunate that sever banks that issue credit cards have put in a lot of brainwork to devise a mechanism to charge you a fee for cash advances. Although this may appear ridiculous, it is something like your local store charging you a fee on the products you purchase from them in addition to the price of the items. However, outrageous it may seem to be, many banks actually follow this practice actively with a view to fatten their profits at the cost of the consumers. And the charges too are hefty with many banks charging as high as four to five per cent on the amount a consumer obtains as cash advance. If you add this extra charge to the approximately 18 to 20 per cent interest you are required to pay on the loan, the total or effective annual interest collected by the bank from you on account of a cash advance is likely to be around 100 per cent or much higher! While this is a jolly good additional income for the banks, it is definitely disastrous for the consumers.

Always remember that obtaining cash advances on a credit card is never beneficial for the consumer. This holds true for all occasions, even if you can locate a bank that claims not charging any cash advance fee. This is because, even if there is no cash advance fee, in reality, when you avail a cash advance, you will be charged a heft rate of interest right from the day you receive the cash. However, cash advances may be helpful in cases of emergency and when the card holder is travelling abroad. Cash advances taken abroad have some logic as it helps to slash the foreign exchange commissions and expenses. It is important to remember that given the present credit card scenario, no banks actually offer grace periods on cash advance even though they may be following the tradition in the case of credit purchases on the cards.

When you are able to get cash at a cheaper interest rate or without paying any interest at all, why should you opt for cash advances on credit cards and be burdened by hefty interest rates till you clear the entire loan. Thus, it is wiser to write a cheque on your bank account or make a withdrawal from your savings account and remain free from paying any interest on the money you receive. It is also advisable to set aside cash advances for travel and for urgent situations. In addition, try and save some money for yourself too. All these measures will enable you to lessen your dependence on the credit cards and make your life tension and interest free.

How to get your best credit card deal

If you are looking forward to have a credit card and want to have the best deal from a bank in your neighborhood, you need to do a few things yourself. The best thing that you can do in this regard is to visit or call up different banks, credit unions and savings and loan associations in your locality to find the pricing of the credit cards issued by them. When you visit these places or call them up over the telephone never forget to inquire about the annual fees, grace periods and interest rates on cash advances or loans on the credit cards issued by them respectively.

When you call a bank, credit union or savings and loan association, ensure that you ask the person you are talking to if he or she is aware of any bank in the locality that issues credit cards at very low interest rates or without any annual fees. Many a times, the bank people you talk to are well informed regarding the costs of the credit cards issued by all the banks in the locality. It is possible that a lot of times, these people would only be too happy to let you know about a competitor bank in the neighborhood that issues credit cards without charging any fees.

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