Many millions of Americans are walking around with credit cards in our wallets and purses, but most of us don't really know all that much about them. Yes, they make spending money easy, but they can also help us dig deep holes of debt. The more you learn about the world of credit cards, the better decisions you'll likely make about them.
If your credit card is lost or stolen and you call the credit card company quickly to let it know, you'll only be on the hook for $50 in unauthorized charges. Here's a helpful tip: Jot down details from, take a photo of, or photocopy your credit cards -- front and back -- so that if any are lost, you'll have their numbers and the phone numbers to call for each.
25% or more
Many credit cards charge annual interest rates of 25% or more -- with many big banks able to raise that rate far higher. That's rather outrageous (especially in this lengthy period of ultra-low interest rates) -- and it can cost you mightily if you're carrying a balance.
Here's an example, using an online calculator: Say you carry a balance of $10,000, with a 25% annual interest rate and a minimum payment of 3% or $15. If you only make minimum payments (not all that unusual for people who have maxed-out cards and are living paycheck to paycheck), it will take you nearly 32 years to pay off that debt, and in the process you'll pay a total of almost $22,000 in interest alone. Jeepers. (A 15% annual interest rate would have shaved that to about $7,000 in interest paid, and a loan life of 18 years.)
The Luhn algorithm
The 16-digit (or 15- or 14-digit) number on your credit card is far from a randomly generated number. You may know that part of the number identifies the issuing lender and part of it identifies your account number, but you probably don't know that all valid credit cards also successfully meet the criteria of the Luhn algorithm. In a nutshell, it involves doubling some digits in your credit card number, adding up various numbers in particular ways, and getting a final result. If that result is not evenly divisible by 10 (that is, it doesn't end in a zero), then you're looking at an invalid credit card number. This is just one way that the industry aims to thwart fraud and theft.
The CARD Act
In 2009, the Credit Card Accountability, Responsibility, and Disclosure Act (known as the CARD Act) was passed, ushering in many consumer-friendly reforms of the credit card industry. You would do well to read up on it more, but here are some of the things it does:
- It reduces the instances of "universal default," in which a credit card lender can hike your interest rate if you're late paying some other debt.
- It gives you the right to opt out of various changes in the terms of your account (including rate hikes) -- if you agree to close out the account. You will have at least five years in which to pay off the debt.
- It reins in the old practice of issuing cards to those under 21. Now card issuers need parental cosigners, or proof that the young people have sufficient income.
- Interest-rate hikes have new limits. There's still no cap on rates, but lenders can only raise them under certain conditions, such as when a promotional rate ends, or you are late paying a bill. You must also get at least 45 days' notice of any substantial rate hikes.
- Card issuers now have to inform you of the consequences of making minimum payments -- such as how long it will take you to pay off the debt.
- You must now be given at least 21 days to pay your bills.
- Late fees and over-limit fees are restricted, and in some cases capped.
A valuable phone call
If you're not happy with the interest rate your credit card is charging you, you can call the lender and ask that it be reduced. Remember that the lender wants your business and is benefiting from all your interest payments, so while it's not guaranteed that customer service will cut you some slack, they very well might. It helps if you've been a good and loyal customer, and if you remind them that you can always transfer the debt to another lender with better terms.
The more you know about credit cards, the less they can cost you.