Fool.com: PayPal Pays a Price [Motley Fool Take] August 2, 2004

Fool.com: PayPal Pays a Price [Motley Fool Take] August 2, 2004

Recently PayPal sent Emails to all of its members addressing a lawsuit settlement which began in 1999. I am simply noting this in order to urge those of you who have PayPal accounts NOT to submit a claim form. I can’t speak for those who were inconvenienced by frozen accounts and whatnot, but I can speak for myself. PayPal has been a genuine service, it’s customer support team is very friendly and informative–I called a month or so ago to ask a question about my PayPal Merchant Card. In my opinion this lawsuit is worthless, notwithstanding the fact that if you or I or anyone submits a claim, the check will more than likely be under a dollar. And that’s not worth any of our time anyway.

Filed under: Finances, Motley Fool, PayPal

0% A.P.R.: What to Watch Out For and Why

“Save With a 0% APR FOR LIFE!*”

I’ll get to the footnote in a moment. This is Discover Card’s new can’t-beat-it deal. The idea is that you transfer a high balance from one card with a higher interest rate to your new Discover card for the low price of $29 max (which, as far as balance transfer fees are concerned, is pretty low: they generally range from nothing–Citibank never charges a balance transfer fee–to $29, to $35, to $50 max). From the surface it seems like a great deal, however, let’s look now at that footnote:

“DEFAULT RATE: If you are late making a payment, any introductory/special rates terminate and the standard purchase APR will apply to purchases and balance transfers. If you fail twice to make a required payment when due or if you exceed your account credit limit twice, your purchase APR will be increased to 19.99%. If you fail 3 times to make a required payment when due or if you exceed your account credit limit 3 times, your purchase APR and cash advance APR will be increased to 24.99%. See Cardmember Agreement for details.”

The idea here is that you should NEVER, under ANY circumstances be late for a payment or exceed your account limit. There are two general rules I abide by in order to ascertain I do neither of these things: 1) I use online bill-pay for all of my credit cards, and 2) I simply structure my spending limit each month.

Online Bill-Pay seems to be the most efficient means of paying a bill in the modern age we live in. Firstly, the payment takes two to three days to post, whereas mailed in statements can take up to ten days (this, of course, includes shipment, processing and non-extenuating delays. Secondly, due to enhanced security features on the Internet, it has proven more difficult for third parties to retrieve sensitive data. Not only that, but if you’ll notice, a user’s account numbers are generally X’ed out and instead he/she is assigned some sort of online account number to further prevent hacking. Once you’ve set up your online bill-pay, generally you are further assigned a username and password to be associated with your account. However, since your bank account information is also being used in order to pay your bill, always make sure you log out as soon as you authorize your payment–this will ensure the maximum amount of security on your behalf. Thirdly, online bill-pay is obviously far more convenient than traditional payment methods, given there are no checks involved, no stamps or envelopes and no phone calls to be made. Just log into your account, click to pay, and authorize. Bam! You’re done in thirty seconds.

By ensuring my spending limit, I am more apt to abide by my credit limitations. I’ve really never had a problem with this personally, however, I’ve been known to have the opposite problem–my credit limits are so high that I feel I can spend more and more money that I don’t have. In order to rectify this, I have set strict regulations on my cards.

That’s easy enough, so what’s the catch?

Well, along with maintaining a timely payment and not exceeding your credit limit, there is one more stipulation which must be met in order to keep the 0% APR for life. That is, the cardholder must make two “Required Transactions” every month. Seems easy, right? Well, the idea here is that the cardholder will–instead of merely making two transactions–use the card regularly. Of course, then, the cardholder is being charged with the Prime Rate plus between 6.99% and 11.99% (making the estimated APR between 10.99% and 15.99%). Remember, it is assumed that one pays off an earlier purchase before a later one. So, in this case, every purchase the cardholder makes will be accruing interest until the initial balance transfer is paid off.

Not only that, but this particular card calculates its balance for purchases using the Two-cycle Average Daily Balance (including new purchases) method. This method computes the average balance over the course of two months instead of one. So, let’s say you make a purchase of $800 and at the end of the month you pay off $400 of the total charge. The next month you will find that you have accumulated interest on the initial balance plus part of the $400 you paid off! Of course, this method really has no bearing on this particular card, given you’ll be accruing interest on all of your transactions anyway (unless you plan to pay off your balance transfer in the first month or so, defeating the purpose of making said transfer).

This particular card is one of those situations, however, where one can really make out if disciplined. Despite all of the negative connotations listed above, if the cardholder was to simply buy a pack of gum twice a month, the interest accrued would be pale in comparison to the savings earned from the interest rate of the previous card. But a word of caution: one forgetful month or one delayed transaction, or as we stated above, one missed payment or one transaction that exceeds your credit limit, bumps the APR from 0% to 19.99% or 24.99%. My friends, that risk I am not willing to take.

What other preventative measures can I take when applying for a card?

Be wary of any 0% APR or other super low APR.

If you cannot pay off your debt within the time period allocated, the rates will sky rocket immensely and you’ll find yourself working hard just to pay off the interest. Make sure you know exactly when your rates will change so that you can mark a time to call and ask to maintain an interest reduction–ensure that this time period is no more than two months and no less than one month from the date in which your APR is set to change. As an example, I called my AT&T Universal Card and asked if I could maintain my 0% APR for an extended length of time. I received six more months of interest free periods instead of what would have changed to Prime plus 8.99% (about 12.99%). Not only that, but the account specialist I was dealing with invited me to call in about four months or so to see if I could further extend this rate. I hope to have my balance paid in full by then, however, it is refreshing to see that these card companies are willing to work with you.

Always pay close attention to the “Schumer Box,” located along with the other fine-print with your initial credit card offer. This chart must be included, by law, with every credit card application due to the Fair Credit and Charge Card Disclosure Act. It basically provides a summary of all costs and fees associated with the credit card. It will give you the APR for purchases, balance transfers and cash advances (introductory and default). Your Variable Rate information will be available, the method by which balance for purchases is computed, and the Grace Period for repayment. It will also let you know of any fees associated with balance transfers and cash advances. Late fees, overdraft fees, and fees associated with exceeding your credit limit will also be displayed. Also, if there is an annual fee, it will be displayed.

That’s a lot to look out for. Can you further explain exactly what I should be looking for?

Following is a summary of every cost associated with most major credit cards:

Interest Rate

All credit card companies will charge you an interest rate for purchases, balance transfers and cash advances. The monthly rate is called the monthly periodic rate and is calculated by simply dividing the annual rate by twelve. The annual rate is called the Annual Percentage Rate. Most companies quote the Annual Percentage Rate versus the monthly periodic rate.

Annual Percentage Rate (APR)

APR’s can be Fixed or Variable, or both. If the initial offer is for a Fixed Rate of 0%, after a certain period of time it may change to a Variable Rate, generally calculated by adding some variable or fixed amount to the Prime Rate.

Fixed APR

A Fixed APR means that the APR is the same from month to month (our 0% APR example is a Fixed Rate). However, do not be deceived by the concept! A credit card company can change the interest rate, legally, at ANY time as long as they submit it to you in writing. If the credit company decides to do this, both new purchases and your outstanding balance is subjected to the change! More often than not, this happens if the bank that issued you your credit card is bought out by another bank. Always make sure you carefully read any addendums to your account.

Variable APR

A Variable APR is tied to general market interest rates (generally a Fixed interest rate plus the Prime Rate).

Default APR

Your Default APR is the interest rate you will incur if you make a late payment, overdraft funds, exceed your credit limit, piss off your customer service representative, or generally in any attempt to breach contract with your credit card. Simply put: make sure you always abide by the Terms of the initial Agreement and when written amendments come in the mail make sure you read them carefully! If you do not agree with New Terms, discontinue the card!

Prime Rate

A short-term interest rate designated by a commercial bank as an indication of the current rate being charged on loans to its best commercial customers.

APRs for Purchases, Balance Transfers and Cash Advances

Remember, generally speaking, a credit card will charge a different APR for purchases than it will for balance transfers and cash advances. Obviously, the only time to transfer a balance is when the interest rate will be lowered (factoring the cost of the balance transfer fee, if applicable). Cash advances are always going to incur a maximum fee and it is generally a bad idea to use your credit card as a means for a short-term loan. It is a far better idea to simply go to your bank and apply for a general loan.

Calculating Interest

Once you know the interest rate your credit card charges you, it is wise to consider the method in calculating said interest rate. There are two primary ways of doing this: 1) using the average daily balance method and 2) using the two-cycle average daily balance method, including new purchases.

Average Daily Balance Method

This is the fairest way of calculating interest. Basically, if you make a purchase and only pay part of it off when your statement comes in, you will only be charged on the remaining balance. For example, if you buy a stereo system for $800 and pay $500 of it off when you receive your statement, you are only charged interest on the remaining $300.

Two-cycle Average Daily Balance Method, including new purchases

This method calculates interest by taking the average of two billing cycles instead of one. So, let’s take the previous example. Your next statement would reflect interest charges on almost the entire $800 balance. Calculating this becomes very complicated and would require dividing your Annual Percentage Rate by 365 in order to determine your daily interest rate. Then you would have to take your outstanding balance for both cycles and multiply those charges by the daily interest rate to determine how much interest would be accrued. Personally, I never go with a card which uses this method, as it seems unfair to the consumer unless the balance is paid in full every month (assuming an adequate Grace Period is allowed).

Grace Period

Your Grace Period is the amount of time between the closing of the bill cycle and the date you must pay your balance in full, so as not to accrue interest on said balance. This only applies, however, if you do not already carry an outstanding balance. Remember, once you carry an outstanding balance on your credit card, you will be charged interest immediately.

Fees, fees and more fees!

No matter what card you choose, there will always be certain fees which go right along with it. There may be fees associated with opening and closing the account, fees for balance transfers and cash advances, fees for exceeding account regulations such as making a late payment or exceeding your credit limit. There may be an overdraft fee. Fees for using the card may also be charged.

Application and/or Processing Fee

This will generally only be applicable if the person applying has a poor credit rating, however, it is a good idea to always ask upon applying for your credit card whether or not you will be incurred an application and/or processing fee.

Termination Fee

I’ve never actually come across such a fee, however, I always ask the bank to whom I’m applying in order to ensure that there is not a termination fee, if I choose to close my account. If I ever come across such a fee, I will promptly deny the issuer my service.

Balance Transfer Fees

As I mentioned in the beginning, balance transfer fees generally range from nothing–Citibank never charges a balance transfer fee–to $29, to $35, to $50 max. These may only be introductory offers, however, so if you plan to make a transfer after you’ve had your account open for some time, I would check and see if the fee has changed. Moreover, it is always a good idea to call the bank itself and ask what sort of offers are available for balance transfers.

Cash Advance Fees

Cash advances are never a good idea, not only because the interest rate is so high, as I said above, but also because sometimes there can even be a fee associated with them.

Late Payment, Exceeding Credit Line, and Overdraft Fees

These fees are very simply to avoid. Always make sure you make your payments on time–I pay my bill as soon as I get it, and I pay online to ensure it will get there in three days or so. I also take a screenshot of the payment receipt and confirmation number and save it to my hardrive. Also, make sure you know how much you’re spending on your credit card. Not only is it embarrassing when your credit card comes back declined, but it can be detrimental to your account status. Similar to exceeding the credit limit on your credit card, don’t exceed funds in your checking account to which you pay your credit card each month. Not only will you incur a fee at your bank or credit union, but also a fee with your credit card. Also, remember that not only do these fees occur when you don’t pay attention, but your account can completely change and you might find yourself paying an exceptionally high interest rate because of a mistake that might have been avoided.

Annual Fee

Finally, there may be a fee associated with simply using the credit card. If a credit card charges an annual fee I will not open an account.

Important Questions to Ask When Applying for a Credit Card:

I’ve gathered some basic questions to ask from Bankrate.com and am publishing them here for your convenience.

• Is there an introductory rate, what is it and how long does it last? After that, what will my rate be?
• Is there an application fee?
• Are there processing fees?
• Is there an annual fee?
• Is there a late fee?
• Is there an over-the-limit fee?
• Are there any other fees, like account termination fees or balance transfer fees?
• When and how can a variable rate be changed?
• When and how can a fixed rate be changed?
• What is the grace period before interest is applied?
• How will you inform me of any changes in my contract?
• Will the company inform me if I am about to go over my limit?
• If I go over my limit, what happens?
• What is the company policy if I have trouble paying my bill?

Amuse Yourself!

If you get a credit card offer you feel is unsatisfactory, or you get any sort of unwarranted solicitation or advertisement where a convenience return envelope is enclosed (one of those envelopes which states “No postage necessary if mailed in the United States”), feel free to send it in the mail, along with the unwanted junk they sent you. I prefer to also add to any credit card offer which simply won’t suit my needs–and generally no one else’s either–a statement in large, bold letters; something to the nature of: “Denied Due to Insufficiency of Offer.” I’ve been thinking of getting a stamp made. Oh what fun it is!

Helpful Links:

www.bankrate.com

www.suzeorman.com

I hope this has helped any of you new, or ignorant, to the credit card application process!

Filed under: Finances, APR, Bankrate, Discover Card, Suze Orman