3 things to never do with a credit card — Transcript

Full transcript

1. 0:07For over four decades, Walter Cavanagh held a truly credit-worthy record:
2. 0:12the most credit cards held by one person.
3. 0:16What began as a bet between friends led him to open over 1,400 cards,
4. 0:23ranging from traditional bank-issued
5. 0:25to those from airlines, gas stations, and even ice cream shops.
6. 0:31Most people have far fewer credit cards.
7. 0:34While useful for secure purchasing, handling emergencies,
8. 0:38and building credit scores,
9. 0:40credit cards can make it difficult to avoid overspending.
10. 0:44Globally, the outstanding credit card debt exceeds trillions of dollars.
11. 0:49And this is no accident.
12. 0:51Credit card companies intentionally design these systems
13. 0:55to encourage spending and lock you into a cycle of interest and fees.
14. 1:01So, how can you avoid their most common traps?
15. 1:06It starts with card selection.
16. 1:09Lenders often aggressively advertise perks like cash back, travel miles,
17. 1:14and discounts.
18. 1:16But these offers only seem generous.
19. 1:19In reality, only a small portion of cardholders actually benefit—
20. 1:24those who pay off their entire balance every month.
21. 1:28But according to one survey,
22. 1:3046% of American cardholders carry a revolving balance.
23. 1:36For these users, the cost of interest and fees
24. 1:39almost always exceeds the value of rewards.
25. 1:43If you think you may fall into this category,
26. 1:46financial experts recommend getting a card
27. 1:50with the lowest annual percentage rate, or APR.
28. 1:55This number is essentially the cost of borrowing money
29. 1:58from the credit card company.
30. 2:00You pay that cost through interest charges,
31. 2:03which kick in as soon as you carry any balance past a statement due date.
32. 2:09While APRs are listed as yearly rates, for most cards, interest accrues daily.
33. 2:15For example, a card with a 35% APR
34. 2:19charges about 0.095% interest per day.
35. 2:25So a revolving balance of $1,000
36. 2:28would accumulate approximately $29 in interest over a month.
37. 2:34Meanwhile, a card with a lower APR, say 18%,
38. 2:38would charge about $15 in interest during the same period.
39. 2:43This difference can add up over time.
40. 2:46If you were to make a $50 monthly payment towards that $1,000 balance,
41. 2:51the card with the higher APR would take an extra $325
42. 2:57and an extra seven months to pay off.
43. 3:01And interest fees can be even more complicated.
44. 3:04If you carry a balance and actively use a card,
45. 3:08new purchases start accruing interest immediately,
46. 3:13even if you pay off those purchases before the statement date.
47. 3:16In other words, once you start to carry a balance,
48. 3:20it’s much more difficult to avoid interest charges going forward.
49. 3:25And even after a bill is fully paid, you might still get one more charge,
50. 3:31something called residual interest,
51. 3:34for the days between your statement and payment date.
52. 3:38Low APR cards are the best option for minimizing these interest charges;
53. 3:44however, be wary of cards that offer exceptionally low APR
54. 3:49for an introductory period.
55. 3:51These flashy offers can mask things like complicated fee structures,
56. 3:56steep late charges,
57. 3:58and high default APRs that kick in once the introductory period ends.
58. 4:05While many countries require companies to disclose these conditions,
59. 4:09they're often buried in the fine print.
60. 4:13Payment structures can also be confusing.
61. 4:15For example, many people mistake the minimum payment
62. 4:19as the standard or even recommended amount to pay.
63. 4:22In reality, it typically only covers interest, fees,
64. 4:26and a small percentage of the balance.
65. 4:29As a result, sticking to just the minimum payment
66. 4:32can make even a low balance of $1,000 take over 18 years to pay off.
67. 4:39Paying the full card balance each month is the best way to avoid fees
68. 4:44and actually benefit from rewards.
69. 4:47But it's not always possible.
70. 4:49So what should you do if you find yourself in credit card debt?
71. 4:53The first step is to assess your finances and create a repayment plan.
72. 4:59If the debt is on a high APR card,
73. 5:02transferring your balance to a lower APR card may help.
74. 5:06Just be sure to check for balance transfer fees.
75. 5:10If you’re juggling debt on multiple cards,
76. 5:12it may be tempting to pay off the lowest balance first.
77. 5:16However, the most financially efficient strategy will always be
78. 5:21to put any extra money towards the card with the highest APR,
79. 5:26regardless of balance.
80. 5:28The key is to chip away one card at a time—
81. 5:32just don’t be like Walter and open a thousand more in the meantime.