New Credit Card - Think Twice Before Ordering , Bills.com Cautio
New credit cards have time, place -- but not for everyone
SAN FRANCISCO, Calif., April 9, 2008 - Every day, Americans are bombarded with special credit card offers -- and opportunities to spend -- but Bills.com co-founder and co-CEO Andrew Housser cautions that consumers should think twice when deciding if they should change credit cards or add new plastic to their wallet.
"In general, credit cards should be used only as a convenience, with payment of the entire balance each month," said Housser, whose free online consumer portal Bills.com (www.bills.com) offers tips on consumer finance.
Many consumers, however, ignore this advice and continue to use credit cards to buy items they cannot pay off at the end of the month. In those cases, " we would hope - at the very least - that the item is of lasting value and the interest rate is reasonable," says Housser. "But 'buyer beware' when it comes to interest."
Housser noted a $5,000 charge on a credit card with an interest rate of 15 percent (reasonable by credit card standards) will take longer than 10 years to pay off with the minimum payment made each month. The cardholder also will pay almost $3,500 in interest during that time - ending up paying almost twice the item’s purchase price.
Some Americans compensate for these dangers by juggling credit cards. With the average American receiving a dozen credit card offers each month, Housser suggested consumers evaluate these offers to decide whether they should change where they charge -- or stay with the status quo.
When to switch:
1.When you have a balance on a store card. Most store credit cards offer appealing initial terms. Later, the interest rates on these cards typically reach 18-22 percent. "If you cannot pay your balance in a month or two, and you have an opportunity to move the balance to a card with lower interest, take it," Housser said.
2.When a "no payments for X months" offer is expiring -- and you cannot pay. You planned to save up to pay off your refrigerator. But you do not have the cash, and are about to be stuck with 12 months' interest charges. "If you transfer the balance to a lower-interest card, the first card will count the item as 'paid,' and you will not owe that interest," Housser explained. For a big-ticket item (like that refrigerator), it might be worth it even if there is a balance transfer fee - if the fee is less than the interest. Whatever you do, pay off the purchase ASAP.
3.If you carry a balance, the balance fluctuates and the card uses two-month billing. Some credit card companies calculate interest ("finance charges") based on the average of the last two months' balances. So if you owe $1,000 in month one and pay it all off in month two, your interest for month three will be calculated on the two previous months' balance of $1,000. "Find a better card," Housser said.
When to stay:
1.When building your credit score. If you are new to building credit or thinking of a major purchase such as a home, avoid changing your financial profile. Opening a new credit card can lower a cardholder's score.
2.When you have an amazing rewards points offer - maybe. Some people add a card because of the great rewards - such as 25,000 points with the first purchase. Those with tremendous discipline can benefit from these deals, especially if they cash in the points for a gift card to replace some cash purchases, and then funnel the money saved to paying off debt. Others become tempted to spend on the shiny new plastic. Still others forget to cancel the card and get stuck with a hefty annual fee. "Unless your self-restraint is tops, do not play with this one," Housser warned.
3.When you are a compulsive spender. Look yourself in the eye. If you get that new credit card, will you max it out, shop excessively or secretly spend? Most people really need only one credit card for personal business and convenience. Housser suggests spenders do themselves a favor and shred applications for new cards.
4.When you are over your head in debt. You can only juggle overwhelming credit card balances for so long. "Another card will just create more headaches. Instead, focus on paying off the bills you have now," Housser said. "Most importantly, quit charging immediately! Cut up your cards or freeze them in a bowl of water if necessary."
"There is a time and a place for everything -- including credit," Housser said. "When the question for your credit card is whether to stay or go, take a good look at the big picture, and do what is best for your wallet."
Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at http://www.bills.com/blog
Since 2002, Bills.com has served more than 40,000 customers nationwide while managing more than $1 billion in consumer debt. Bills.com is a division of Freedom Financial Network, LLC, whose co-founders and CEOs, Andrew Housser and Brad Stroh, have been named Northern California finalists in Ernst & Young's Entrepreneur of the Year Awards.