The pros and cons of credit cards

This was originally published on Monday, August 21, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Almost everyone uses a credit card these days especially with the boom of online retail. You can’t rent a car or make a hotel reservation without one.

The ease of swiping your card makes it too easy to pay bills or cover you in case of an emergency. This ease of use can also land you in deep debt. Before making the decision to get a credit card, consider these pros and cons.

Pros

  • Purchasing power: the power to make a purchase while traveling overseas, online, by phone and of course in the store. Many of the large credit card issuers like Visa and Master Card are accepted nearly everywhere.
  • Financial backup: In case you have an unexpected event like a busted pipe in your kitchen, your credit card can be used to pay for parts and, in some cases, a plumber without going to an ATM. They can also help in case of a health care emergency or an expensive auto repair.
  • Rewards: Some cards will reward you for using their credit card for every-day purchases such as gas or groceries. Others will reward you when you travel or award cash back as an incentive.
  • Credit score: If you use your card wisely it will certainly help your credit history. It can also help repair your credit by showing how responsible you are by making your payments on time.
  • Expense record: Especially when you are traveling, a credit card can help you keep track of your expenses
  • Pay later: It has happened to the best of us, and we run short of cash and need to buy groceries or fuel. You are able to make your purchase and pay it off later.
  • Protection: Credit cards allow you to dispute billing errors and some even provide insurance for expensive purchases. Most credit cards are now equipped with an EVM chip. A Europay, MasterCard and Visa chip is a global standard for credit cards to authenticate and secure transactions. The EVM chip is much harder to hack than a swipe strip. In the case of a fraudulent transaction, the card holder is usually protected.

Cons

  • Interest: A high annual percentage rate can send you deep into debt if you do not make significant monthly payments or pay your balance off.
  • More usage: Studies have shown that people tend to purchase more when they use a credit card. Some feel compelled to spend more than what they have.
  • Late fees: If you do not make a payment you incur a late fee. Although it may be $30 to $50, it adds up quickly if you repeat this habit. Sometimes consumers will allow the balance to roll over for several months racking up interest and late fees.
  • Bad credit: Studies have shown that many people fall into serious debt due to poor credit card habits. Carrying a large amount of debt and acquiring too much debt can ruin your credit score.

After weighing the pros and cons and understanding the type of credit card that is suitable for you and your lifestyle, remember to keep track of your purchases, avoid overspending and make timely payments to avoid extra fees. Use your card with reputable businesses and if your card is lost or stolen, report it to your credit card company as soon as possible.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

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Variety of credit cards from which to choose

This was originally published on Monday, August 21, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

There are many types of credit cards and not all cards are for everyone. Before you begin applying for a credit card, you should check your credit score to ensure that there are not errors that could prevent you from getting the best interest rates.

Most people feel that the credit card company is the most important factor — Visa, Mastercard, etc. Although that should be factored into your decision, here are other types of cards you ought to consider:

Standard credit card. These are no frills and no rewards, just credit. If you simply want a credit card to make an occasional purchase, then this card is for you. They are relatively easy to understand and most financial institutions offer this type of card.

Usually there are different interest rates for standard purchases, cash advances and balance transfers. Your interest rates are determined by your credit history.

Rewards Credit Card. These cards encourage you to use their credit cards when you make purchases by rewarding you with cash back, points or merchandise.

  • Cash back. This reward is getting a certain percentage of your purchase back as cash. Most cards offer 1 percent to 3 percent for general purchases and sometimes a higher percentage at a certain store for certain purchases, such as groceries. Look for a card with low or no annual fees.
  • Travel. If you are an avid traveler, this card may be of interest to you. Many airlines team up with a bank to offer an exclusive airline credit card. Making purchases with these cards earns mileage or discounts with partner hotels and rental car chains. Some may waive baggage fees or access to airport membership clubs. Accumulated points can also be used to upgrade seating on a trip.
  • Merchandise. You receive points for your purchases, which can be exchanged for merchandise that the credit card issuer sells. These items can be small, like a watch, to larger items such as tablets, cameras and even jewelry.

Student credit cards. This card is designed for college students. Students usually must be enrolled in a four-year university. These cards usually have a lower interest and lower credit limits. Students should be careful they don’t go overboard and get into debt they cannot pay off with little to no income.

Premium cards. These are offered to those with high income and excellent credit. They usually enjoy perks such as personal shoppers, hotel room upgrades, access to airport lounges and priority airline boarding. These perks usually come with high annual fees.

Store credit cards. Some large retail chains offer in-store credit cards. Sometimes they are issued by a financial institution and not by the store directly. Usually, a clerk or manager can issue you a card right in the store. The card is issued after a quick credit check. Most of the time, a salesperson will offer you a discount if you open a card during your visit. Store credit cards usually have high interest rates, especially if you do not pay your monthly balance in full.

Retail credit cards. Large credit card issuers may partner with a major retailer. These are not like the in-store credit cards, which can only be used at the store. These can be used anywhere, like a regular card, but their rewards offer perks at their store or online website, such as free shipping and discounts not offered to other customers. You can only redeem the reward with the retailer and interest rates are usually high.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Differences between debit card and credit card

This was originally published on Monday, August 14, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Credit cards can be a great tool to build credit, but they can also be financially dangerous. A credit card is nothing but a tool. Depending on the skills, knowledge, and self-control of the user, it can be helpful or harmful. Understanding your credit card and its terms is vital to using it properly.

Your credit and debit cards may look very similar, but they work very differently. Credit cards are a revolving line of credit, credit that is automatically renewed as debts are paid off. Your debit card is electronically linked to your checking account. Here are some other differences:

  • Spending limit. Your credit card limit is set based on your credit score — the better your score, the higher your credit limit is. Your debit card is limited to the funds you have in your checking account. Both can be assessed an over-the-limit fee if you go over available funds.
  • Interest rates. If you pay your credit card’s full balance off each month, you won’t have to pay interest. If you make a monthly payment, you will be charged an interest fee based on your balance. A debit card has no interest changed. If you keep funds in your account, you may be paid some interest.
  • Payments. You can pay your credit card balance based on how much money you have. You can pay the minimum required monthly payment up to the full balance of your credit card. With a debit card, your account is debited almost immediately when you make a purchase.
  • Fees. Most credit cards charge an annual fee, late payment fees and over-the-limit fees. If you try to make a purchase using a debit card and don’t have enough money to cover the charge in your account, you may incur an insufficient fund fee.
  • Receiving cash. You can use your credit card to get money from an ATM, called a cash advance. Most credit cards charge a different, higher interest rate for cash advances. If you use your an ATM of your debit card’s financial institution, or a point-of-sales machine at a store, you may not have to pay a fee. For both credit and debit cards, there are usually fees associated with using a different financial institution’s ATM.
  • Effect on your credit. Your credit card affects your credit history. To build a positive credit history, you should use your card regularly, pay off your monthly balance in full, make your payments on time, and not close your account unless you absolutely have to. Your debit card may affect your credit history if you constantly go over your account balance and are charged overdraft fees.

Secured vs. unsecured

There are two types of credit cards, secured and unsecured. A secured credit card limit is determined by the amount of cash deposited before being able to make a purchase. The cash deposited acts as collateral, something provided to a lender as a promise of payment/reimbursement.

Secured credit cards are a great opportunity to establish a good credit history. Unlike a prepaid credit card, your cash deposit doesn’t run out. You continue to make payments and will incur interest if you don’t pay off your balance in full. If you cancel your secured credit card or transition into an unsecured credit card, you will receive your deposit back if your balance is paid off.

Unsecured credit cards don’t require collateral, so issuers take more of a risk. Because of this risk, issuers rely heavily on your income level and credit history.

Most first-time credit card users don’t have a long enough credit history for issuers to approve a large amount of credit. Many times, a co-signer is needed.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Find right credit card for you

This was originally published on Monday, August 7, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I have never had a credit card and have always used cash. I am considering getting one to use in case of emergencies and for the trip I am planning next summer. I have considered several types but honestly, I find it all a bit confusing. Do you have any tips that could help me decide which credit card is a fit for a first-time owner?

Answer: There are many types of credit cards and looking for the right one can be perplexing and overwhelming. Taking the time to find one that fits your lifestyle and budget is essential.

When used responsibly, a credit card can help you build a good credit history. Good credit history can help you get loans with reasonable interest rates, insurance, cell phone plans and, in some cases, secure a good job.

Some cards reward you for using their cards and others can help you protect your purchases in case of theft or damage. In your case, you may need a credit card to secure your travel plans such as rental cars and hotels.

Before you decide, ask yourself three questions: Do you really need a credit card? How much of my budget can you commit to paying the credit card loan (because that is what a credit card is, a loan)? Can you save to purchase the item instead of using a credit card?

Answer these questions honestly. Knowing the answers to these questions will help you determine which card meets your needs. There are other aspects that you should understand before making a decision.

Short-term loan

A credit card is basically a short-term loan. Depending on the amount you pay monthly, you may or may not accrue interest. If you pay your entire credit card balance at the end of the billing cycle, you will not accrue interest. However, if you pay a partial amount of your balance, you will accrue interest on your average daily balance. The interest is a charge for borrowing the money.

 If you pay just the minimum balance each month, you could find yourself in a long-term cycle of debt. By law your credit card statement must show you the difference of paying off the minimum balance versus making a larger payment.

A normal billing cycle is usually 30 days. Most billing cycles will have a few days grace to pay on your loan. If you miss the cutoff date, a late fee will be assessed.

Credit cards use revolving credit that is automatically renewed as the balance is paid off and can be kept open indefinitely. Your credit limit, or line of credit, is the maximum amount you can borrow. If you have reached that limit, you must pay down the balance before you can borrow more. Some credit cards will assess charges that are beyond your limit and will charge you “over the limit” fees which can be a monthly or daily fee.

Why get a credit card?

There may be many personal reasons why you may need one, but from a financial point of view, a credit card is a method of building good credit. Your credit score is factored by your payment history, the amount you owe on your accounts, how long you have had the credit and the type of credit you use.

Another reason for owning a credit card may be the perks. Some cards offer cash, points or other bonuses. For example, if you travel a lot, consider getting a card that rewards you with airline miles or points for hotel stays. Some cards offer discounts at certain partnering stores or gas stations.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

 

Handling problems with your card

This was originally published on Monday, October 3 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Q: I was at the store the other day and used my debit card to make a purchase. To my surprise my transaction was denied. I checked my account right away and noticed that there were several suspicious charges from a company I use frequently. I was embarrassed and because of these charges my account was overdrawn. I have several scheduled automatic payments that are not going to be paid. I’m scared my account has been compromised, what should I do?

A: It is a scary feeling to think you have enough money to cover your day-to-day expenses and then discover that your account has been compromised. So many questions form in your mind and you start to think of the worst.

In this day and age, we use our debit or credit cards to pay for almost anything, making us susceptible to fraudulent charges. Unauthorized debit card charges can happen for many reasons. Some of the more common reasons are accidentally being charged twice, being overcharged, a credit return failed or nondelivery of goods through the mail.

No matter the reason, the sooner the mistake is found, the better chance you have on disputing the charge.

  • Gather all information. Take time and look through all your receipts. If you share a joint account, ask the joint holder if they recently made the purchase. Be aware that some online stores use a third party to handle their purchases and the statement will list that third party’s name, not the online shop’s. If you are certain that the charge is fraudulent, contact your bank right away. Inform your bank that you have unauthorized charges on your statement and that you will be contacting the merchant. Your bank will then discuss several options with you including freezing your account until more information is provided.
  • Contact the merchant. If you have a phone number, call the merchant and discuss the charges. Ask if there is anything they can do to reverse the charges. Most merchants value your patronage and are usually willing to work with you, especially if the error is a mathematical mistake or a non-receipt of a product or service. If the merchant is not willing to correct the error, then contact your financial institution. By contacting the merchant first, you are showing a “good faith” effort to work out the situation.
  • Work with your bank. If the merchant refuses to rectify the mistake, you have 60 days from the time of the unauthorized purchase before being held accountable. Let your bank know that you contacted the merchant and they are unwilling to reverse the charges. The bank has 10 days to investigate an unauthorized charge. After the 10 days, your bank must contact you with their findings within three days. If the investigation is incomplete after the 10 days, your financial institution must credit your account for the full disputed amount, less $50, while continuing the investigation.

If the transaction was conducted within the United States, the financial institution has an additional 45 days to resolve the issue. If the transaction is made outside the United States, then your financial institution has 90 days to resolve the issue. If the bank finds that there is an error that has occurred, they must pay you within one business day of finding that error.

On the other hand, if the charges are legitimate, the financial institution must give you written notice before taking the money that was credited to you earlier. If you used your debit card as a credit card, you may fall under different guidelines which can be found at http://www.consumerfinance.gov.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

Tips for a first-time credit card owner

This was originally published on Monday, October 27, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I was just approved for my first credit card. I’m excited that I’m now creditworthy, but numerous people have expressed to me that owning a credit card has put them in some financial troubles. Do you have any tips for a first-time credit card owner?

Answer: Congratulations on your first credit card! Yes, owning a credit card is opening a whole new world of financial responsibilities. It’s true that credit cards can lead some to financial hardship if spending goes out of control. But if used properly, it also can be a beneficial financial tool. Using a credit card wisely can improve your credit rating, which can qualify you for low interest rates when purchasing a car or a home, or it may help get a job. Here are some tips to keep you on the right financial path.

•  Know your monthly limit. Take some time to review your budget to see how much you can afford to spend monthly. Remember that the credit card company will charge you interest on the balance of your card.

• Never skip a payment. It’s best to pay the balance of your card off every month. Credit card companies make money not on what you owe but the interest it accrues. If you cannot pay the full amount, at least make the minimum payment. But do not get in the habit of paying just the minimum balance. Paying the minimum balance can take years to pay the balance off and in the end, you would have paid more in interest than the amount you originally owed. Read your contract carefully. There usually is a different interest rate for cash advances on your card. Missing a payment could result in a late payment fee and a negative hit on your credit score.

• Use it responsibly. A credit card should be used with caution. If you have cash on hand, it’s best to use the money first. Use the card for needs and not extravagant wants. Credit cards can be used in emergency situations. Try not to go over the monthly limit you set for yourself.

• Use your rewards. If your card has a reward system, take full advantage of it. Some may offer cash back that you can use toward your payments. Others may offer gifts and some may earn airline mileage. Most of the time, these rewards have a time limit of when you can claim them. Read your contract. You earned those rewards, so you should cash in on them.

• Remember 30 percent. Keep this number in the back of your mind. It’s the optimum percentage of your credit utilization ratio. This ratio is your total credit available to how much credit you are using. This ratio weighs heavily on your credit score. If the ratio is low, it positively affects your score. If it’s higher than 30 percent, it will bring your credit score down. For example, if your credit limit is $1,000, you should not carry a balance over 30 percent or $300. If later on in years you decide to get another credit card, the combined total of your cards and the balance you have should stay at 30 percent or lower. In other words, if you have a two cards that have a combined total of a $5,000 credit limit, your combined balance should not exceed $1,500.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Help! My high balance is hurting my credit score

This was originally published on Monday, October 20, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My credit score is just above average. The reason for this is because of my high balance on my only credit card. I know I need to pay down the balance, but I have also heard there are other ways to improve my score such as closing my account or asking for a lower limit. Are there other ways to improve my score?

Answer: First, let me commend you on understanding what’s hurting your credit score. Many people don’t look at their credit score until they’re in dire straits. It seems that there’s a lot of advice floating around out there on the best ways to improve your credit score when it comes to credit cards. Some may help and others can be very detrimental. My best advice is good old-fashioned personal restraint from using it and paying off the balance. Here are some tips that I’ve heard and why they’re not feasible.

•  Closing a credit card. On your credit score, one of the most heavily weighed factors is your balance to credit limit ratio, or how much you owe. This category accounts for 30 percent of your score. Once you pay off a credit card and close it, the credit card issuer can decide if the history of the card remains on your credit score. If they decide to take the credit card off your report, you will lose the history that goes along with it. That would not help your score because credit history accounts for 15 percent of your credit score.

Since this is the only card you have, it might hurt you more than someone who has numerous credit cards. If the credit card issuer leaves the closed account on your report, the history will only stay for 10 years. An account that is open, even with little activity, can stay on your report as long as it stays open.

•  Requesting a lower credit limit. As I mentioned previously, one of the heaviest-weighed factors on your credit score is based on how much you owe. If you cannot pay down your debt but you lower your credit limit, you will increase your balance-to-credit-limit ratio. This would severely hurt your score.

• Opening new credit cards. Because your ratio of the amount you owe to the amount of available credit is so heavily weighed, you’d think that opening more cards to increase your limit would work. Yes, opening more cards will raise your credit limit, but opening more accounts all at once will hurt your score. Each time a credit card issuer opens an account for you, they will look at your credit score. These inquiries will actually lower your score. If you want to increase your credit limit by opening new cards, do so by spacing them out over a few years.

• Not using your card once you pay it off. Once again the ratio of indebtedness to credit limit plays a factor in this decision as well. You should use your card regularly, but in amounts that you can pay off the balance in full on the month it’s due. If there’s no activity within a certain period of time, your card issuer may close it.

• Checking your credit score regularly. When you check your credit score regularly, it won’t hurt your credit score. Inquiries from banks, loaning agencies and credit card issuers will. Credit lenders report to the credit bureaus every 30 days. It’s very smart to stay on top of your credit score.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.