Since the passing of the new credit card bill as of February 22, 2010 since President Obama’s call on Congress to pass credit card reform by Memorial Day, many changes have occurred. We have covered many aspects of the changes that have been happening, so we will not repeat ourselves like a broken record. However, if you wish to read more on this, follow our link to get the scoop (or a memory jog).
Today, we are going to cover what people should know as far as new credit cards. You will notice that there are many credit cards now being offered with lower interest rates, and other promises that could entice a prospective customer (old or new). Technically with the new law makes it harder for credit card companies to hike rates and fees as of February 2010. But that bill doesn’t guarantee that a new card offer is in your best interest. I hate to say the obvious but, you REALLY need to look at the big picture, and decide if you really need an extra credit card, and whether you are able to handle your finances in your best interest. Here are some things to look at when deciding to open a new credit card account.
Okay, let’s start off with APR – What in the heck is APR? Ok, I have that dumb look on my face as well, and scratching my head – so I have broken it down for regular folk likes me (At least I am willing to admit that I have no clue what APR meant, even if we have the full acronym blurted out). It sounds all alien, but what it is Annual Percentage Rate and it is describes the interest rate for a whole year instead of a monthly rate. Please be patient, because we will go into detail very soon about APR (Annual Percentage Rate). Because this is so vital, we want to take some time to decipher the mumble jumble and deliver a very clear explanation.
We’ll start a little journey by telling you that APR is broken into two distinct categories, but are act as a couple.
- The nominal APR is the simple-interest rate (for a year).
- The effective APR is the fee plus a compound interest rate (calculated across a year)
(This is the part that you HAVE to watch out for!)
The best way to describe the way of the new credit card application that sticks to the new credit card law is by an example of a potential real life situation. The example that we are going to describe does not name or represent a specific credit card or person.
After hearing a great credit card off that offers 0% APR for one year, you apply for that credit card. Yay, you got it and feeling like Superfly, so you bugger off and spent $1,000 on the card and decided to make only the minimum payments for that first year.
Later on, you took out a $2,000 cash advance — not realizing there was a cash advance fee — and that cash advances are at a much higher rate than purchases. For some mishap, things are getting rough, so you have no choice and missed two payments, which triggered two late fee charges.
Because of your missed payments, it also triggered a default rate — and suddenly your card rate was raised to 29.9%. Feeling the burn, you smarten up and eventually paid off the entire card and closed the account.
The Moral of this scenario is to show you that evil may lurk when you jump ahead without thinking.
Let’s add up the total costs to the card:
• $75 interest on purchases
• $379 interest on cash advances
• $60 cash advance fee
• $78 late charge fee
That’s a grand total of $592 on all these extra costs, which makes your “effective APR” 19.7% on a card that was supposed to be 0% APR.
In the U.S. and the UK, lenders are required to disclose the APR before the loan (or credit application) is finalized (although the definition of “APR” is not the same in the two countries-–see below). Credit card companies can advertise monthly interest rates, but they are required to clearly state the annual percentage rate before an agreement is signed. APR is a term used with regard to deposit accounts as well. However, when dealing with deposit accounts, the annual percentage yield (APY) or annual equivalent rate (AER) is quoted to consumers for comparison purposes.
Ouch this really hurts guys and gals. Please bear in mind that we are not knocking down any credit card company, but you really need to get things into perspective before you decide to open a new credit card. Again, we will return to describe the 2 different APR’s in a later article, so please stay tuned.
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