Heeeyyy!! Welcome back!!
This is the third and final part of this series on personal finance terms. You can click the links below to catch up on part one and part two!
5 Personal Finance Terms In Plain English
Part Two – 5 Personal Finance Terms In Plain English
I feel like debt is such a commonplace thing in people’s lives today and frankly, I think it can be debilitating.
It can be debilitating because debt keeps us from making the best choices in our lives.
We are in debt so we place our children in an inadequate public school system when, if we didn’t have so much debt, we could actually afford to put them in a good private school.
Or we are in debt, feel like it’s hopeless, then incur even more debt as a way to make ourselves feel better (for a short time).
I have had debt in the past and I currently have debt, but what I have never had is so much debt that it keeps me from sleeping at night.
Credit card companies, banks, retailers and anyone else trying to sell you something want you to be confused when it comes to their products. They just want to sell or give you the next “thing”.
So I am going to focus on some personal finance terms you may hear when it comes to credit cards.
Definitions are taken from the book Personal Finance by E. Thomas Garman and Raymond E. Forgue.
1. Revolving/Open-ended credit. Credit cards are considered open-ended credit. Revolving/open-ended credit is “extended in advance” so that the borrower does not need to reapply each time credit is desired.
Isn’t that something? You are given credit in advance. You can use it up to its limit and you do not have to keep reapplying. Sounds like a deal doesn’t it.
Sorry, it’s a trap. Credit card companies want to get you caught in the “trap” of credit card use until you are in over your head and you begin to abuse the credit.
They raise your spending limits without asking you. They charge you fees if you pay late. And they graciously give you cash advances all while charging you a higher interest rate.
The bottom line is that credit card companies are in the game to win for themselves. And if they win, that means you lose. So, know what you are getting yourself into.
2. Introductory/teaser rate. This is a “temporary low rate” that you can get with a new credit card. It’s initially low so that you will apply to open an account.
The rate MUST stay low for a minimum of six months UNLESS you violate the rules, such as making a payment late.
Normal teaser rates are from 0 to 2.9%. After the introductory period, rates can jump as high as 19 or 23%!!
Some people like to pay the dangerous game of balance transfers where they transfer their credit card balances between cards to take advantage of the teaser rates. Hmmmm…
Once again, know what you are getting yourself into!
3. Cash advance. When you receive a new credit card, you may receive a convenience check. If you write and cash one of these checks, you will have taken a cash advance on your credit card.
Or you can simply draw a cash advance directly from the card.
The interest rate on cash advances is much higher than the interest rate you pay on purchases. Also, interest starts accruing on cash advances immediately–there is no grace period.
There may be a transaction fee to get a cash advance. And there even may be a minimum amount of money that you have to withdraw just to get an advance.
I say do what you need to do but a credit card cash advance probably shouldn’t be your first option.
4. Grace period. A grace period is a “time period” between when you buy an item, it posts to your credit card, and when you actually have to pay for that item–its due date.
If you pay your credit card during the grace period, you can avoid paying finance charges. But grace periods are only offered if your previous month’s balance was paid in full and on time.
So if you carry a credit card balance from month to month, you are not receiving a grace period, and you are being charged interest on your unpaid balance and new purchases.
Commonly, people think they are not paying interest because they pay before the due date. I’m afraid that is not so.
5. Minimum payment. If you decide to carry a balance on your credit card from month to month, then a minimum payment must be paid every month to cover interest and a small payment on the amount owed.
It has to be the amount that the credit card company sets as the minimum payment or you will be in default on your credit card. And when you are in default, the credit card company can charge you all sorts of excessive fees. Annnddd, you have no recourse, because you are actually in default.
Also, if you continue to only make the minimum payment on a credit card, it can take you years to actually pay it off. It’s a trap. Credit card companies set a low minimum payment so they can continue to earn interest from you every single month.
Don’t fall for it!
6. Bonus word: Fair Credit Billing Act. I am adding this bonus word in here because I want you to know that you have a recourse if you need help dealing with credit card companies and billing errors.
The Fair Credit Billing Act (FCBA) is designed to help the consumer with errors in their “open-end” credit accounts such as credit cards.
The FCBA is a United States federal law.
The FCBA can do what is called a chargeback. That means that if you dispute or challenge a charge on your credit card, the FBCA can actually charge back the original amount of a transaction to the business where the transaction originated.
You have 60 days, from the date on your bill, to do a written complaint if you feel like there is an error.
The credit card company has 30 days to acknowledge your complaint.
And they have 90 days to either correct the error, return any money owed to you, or provide evidence that the bill is not an error.
While the dispute is ongoing, the creditor can not harass you for the amount of money that is in dispute nor can they assess any interest or penalties for that amount.
At times, it feels like consumers have no way to fight back. Here is one weapon that we have in our arsenal. Let’s use it.
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