For Gold, Peace, and Freedom


Shopping for Credit Card Debt

January 9th, 2009

credit-card-shopping.jpgAlthough credit cards are certainly not my favorite financial instrument, American society has made it increasingly difficult to get by without them. This article by ShawnTe Pierce explains some simple rules to go by for those who are shopping for a credit card and trying to figure out whether or not they are able to sustain any type of debt.

Credit cards are an essential part of our economy in these times. They are needed for a variety of things such as obtaining satellite TV service, movie rental club memberships, and sometimes even authenticating a PayPal account. A few simple questions need to be considered before applying for a credit card and this article will attempt to guide you through them.

Credit cards are a consumer debt product. You are given a line of credit from which you may use to purchase goods or services, and every month you are expected to repay the amount you used. This is called borrowing, otherwise known as accumulating debt. All lenders evaluate your three C’s: character (credit history), capacity (ability to repay), and capital (funds at your disposal).

Now it is time to develop a financial self analysis checklist to determine if you can handle acquiring additional debt.

  • Employment Status: are you employed or unemployed?
  • Employment Stability: how long have you been on your job and has your job engaged in any recent downsizing efforts?
  • Total Monthly Income: how much comes into your household each month?
  • Monthly Household Budget: if you have not planned one out you should consider doing so before seeking additional debt
  • Amount of Debt Currently Owed: this includes other credit and charge cards, auto loans, mortgages, personal loans, student loans, etc.

First of all, if you’re unemployed, the idea of you acquiring debt of any kind is asking for trouble. For those out of school, this is a non-issue as credit card issuers require a minimum income for consideration in obtaining a credit card. However, for the college student, there are student credit cards available which do not require a minimum income. While this may seem like the answer for those times when cash is low, it is a trap that you will get yourself entangled in once the credit card statement arrives and you do not have the funds to pay the bill.

Questions two through five depend on you honestly evaluating your situation. If you have been on your job less than a year, especially with the economy as it is, new debt is not for you. If your job is downsizing, new debt is a bad idea. However, your view on this depends on how realistically you look at your current situation.

Keep in mind the issuing bank will be evaluating your capacity to repay the debt you are seeking. So when performing this self-analysis, put yourself in the shoes of the lender, the issuing bank. Would you extend credit to you? If your answer is no, it is probable the issuing bank will deny your credit card application. If you are not sure, maybe you should hold off until your financial situation improves somewhat.

Your credit rating is what will ultimately garner you an approval or denial. If you have no credit history you still may be able to get a credit card as long as your capacity to pay does not indicate a high risk for the issuing bank. If you have great credit in addition to an acceptable capacity to repay the debt, then you are an ideal customer for the credit card issuer.

Thanks to the Truth in Lending Act (TILA) or Regulation Z, credit card issuers have to disclose their terms on all advertising materials. Most important of these disclosures is rate data. A very important tool that shows significant rate and fee information is the Schumer box named after its chief legislator, Senator Charles Schumer.

The Schumer box is a table of disclosures that include:

  1. Annual fee (if applicable)
  2. Annual Percentage Rate (APR) for purchases
  3. Other APRs (balance transfers, cash advances, default APRs)
  4. Grace period
  5. Finance calculation method
  6. Other transaction fees, such as balance transfers, cash advances, late payments, going over the agreed credit limit, etc.

The Schumer box also requires that all long term rate information be in at least 18 point type and all other terms and conditions in 12 point type.

Issuing Banks have used the same format for the Schumer box for all of their credit card advertising materials. This makes it easier for you, the consumer, to compare credit rate and credit fee information. Take notice that it is rare an issuer will call the Schumer box by this name. The disclosures of the Schumer box may be listed under such titles or headings as:

  1. Disclosures
  2. Card at a Glance
  3. Fees and Rates
  4. Terms
  5. Summary of terms

Regardless of what name the issuing bank applies to the Schumer box, the table holds the same types of information in the same format.

Also check for hidden fees, penalties, and term change disclosures. For instance the credit card issuer will often advise in the small print of their disclosure that they do have the right to change the terms of the agreement while you are a customer. These changes will be at the discretion of the issuing bank, however they have to give you advance warning of these changes that will take effect. Often times these term change disclosures will appear within the “junk” offers and advertisements that come along with your monthly billing statement. It is wise for you to always sift through these advertisements to check for special notices or disclosures related to your credit card account.

Penalties also arise from mismanaging your account. One missed payment, one over limit, one returned payment, one late payment on your account, or even a drop in your FICO score can cause the following to happen to your credit card account:

  • Your current APR will change to the default APR which can be anywhere between 23.99% to 31.99%.
  • Your grace period may be taken away from you.
  • Additional fees such as late fees and over limit fees will incur.

Credit cards are a convenience and sometimes a necessity in today’s society. However, be wise in making the decision to apply for a credit card by doing a self evaluation of your three C’s. Be diligent in researching the terms different credit cards have. Always make sure you either pay off your balance or at least make your minimum payment on time every month. Remember that a wise consumer knows what they can handle and searches for the best bargain with the most benefits.

2 Responses to “Shopping for Credit Card Debt”

  1. comment number 1 by: Doris A. Bias

    I just want to thank you Shawn Te Pierce for this valuable information.
    I for one cannot afford any credit cards right now and I will forward this article to some friends that needs to read this article.

  2. comment number 2 by: Janel

    Can someone tell me if it would still be wise to get a student card, even if you don’t have a steady job? I do work study and have summer jobs but a credit card would help me out when cash is low.

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