Know your credit cards

JOHN MACDONALD

The new $200 Android
phone that you just charged
could turn out to cost you over
a $1,000 or even prevent you
from transferring to the college
or graduate school of your
choice. These or worse could
very well happen if you use
your credit card too much and
only make the minimum payment
on your credit card bill.
A 2010 J.D. Powers survey
revealed that the average credit
card balance for an undergraduate
is almost $3200 and
is $4,100 by the time that they
graduate. Almost 20 percent of
college seniors graduate with
card balances over $7,000.
Carrying a $3,200 credit card
balance may not seem a big
deal. After all, the minimum
monthly payment required by
their lenders is usually 1 percent
of the balance or $32 a
month on $3,200.
But paying the minimum
monthly payment is one of the
biggest mistakes that you can
make. It causes your original
debt to grow and grow. yet,
according to the survey, 40
percent of 18-to-29-year-olds
made only the minimum payment
during some part of 2009.
I recently received an offer
from Capitalone for a credit
card with 24 percent annual
interest. The monthly minimum
payment is 1 percent of
the outstanding balance. And
that is where the trouble lies.
A 24 percent annual interest
rate roughly equates to 2 percent
a month. If you charge
that $200 Android on a credit
card like this, you will get a
bill the following month that
shows your $200 balance,
along with a $4 interest charge,
for a total balance of $204.
your minimum payment will
be 1 percent or $2.04 cents.
That leaves $1.96 of the interest
charge unpaid. Next month
your balance will be $201.96.
Because your balance has
increased, your monthly interest
and minimum payment also
increase. These increases may
seem insignificant, but they
continue to add up
After five years, you have
will have paid for the phone is
approximately $165. The
unpaid balance is $359. As
long as you keep on paying the
monthly minimum, they keep
on increasing.
At the 10-year mark, you will
have paid out almost $463 but
still owe the credit card $638.
That is how charging a $200
phone can end up costing over
a $1,000. Keep on paying only
the monthly minimum, and
you will pay more and more
for that phone the rest of your
life.
J.D. Powers reported that 40
percent of 18-24 year-olds only
made the minimum payment in
some part of 2009.
All student credit cards have
a late fee, according to the survey
report, usually $39. In
2008 20 percent of students
paid a late fee on their card and
15 percent had to pay a fee for
exceeding their credit limit.
A single late fee of $39, the
norm, in the above scenario
makes things drastically worse.
Instead of $463 at the ten-year
mark, you will have paid $538.
your unpaid balance increases
from $638 to almost $750.
The average credit card balance
for an undergraduate is
almost $3,200 and is $4,100 by
the time that they graduate. By
paying only the monthly minimum,
in five years that $4100
will cost almost $4000 in interest
payments, leaving an everincreasing
balance of almost
$7,400.
According to an article on
the student finance advice
website FastWeb.com, carrying
too much credit debt can be
devastating.
Under most credit card
agreements, the credit card
company can arbitrarily
change your interest rate at any
time. FastWeb cited the story
of Collete, a student whose
credit card issuer increased her
interest rate from 9.9 percent to
27 percent.
Credit card debt can even
prevent you from going to the
college or graduate school of
your choice. That’s because
financial aid decisions are
based on income, not on
expenses, according to ronald
Johnson, director of financial
aid at UClA, cited in the
FastWeb article.
Johnson is quoted as saying:
“If they are paying huge sums
to credit card companies, they
may not have the cash available
for their financial contribution.
That could mean that
the child won’t be able to
attend the university.”
Although he was talking about
the parents’ financial contribution,
the same thing is true for
students who support themselves.
So how can you avoid paying
$1,000 for that Android or
being kept out of the college or
graduate school of your
choice? I’ll have the answers
in the next issue of the
Centurion when I reveal credit
card tips from the experts. In
the meantime, No mATTer
WhAT’S IN yoUr WAlleT,
KeeP IT There!