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The True Price of Credit

Buying with plastic can cost you little or plenty - depending on how you use it. Knowing the true price of credit before you charge can save countless dollars and hours of anxiety.

Be aware of your grace period. Typically between 15 to 30 days, this is the time you have before interest is assessed. Some creditors only charge interest on carried-over balances, others on past debt plus current purchases (thereby eliminating a grace period). There is no grace period for cash advances - interest accumulates immediately, and in most cases you will also be charged a 2-3% service fee, making this a very costly form of credit.

The average credit card annual percentage rate (APR) is 14% – but make a late payment or two and it can skyrocket to the upper twenty’s. Though seductively low introductory and balance transfer rates exist, such deals expire quickly. Compare a $2,000 debt with 14% APR with the same balance, but 29% APR:

Balance $2,000.00
Payment $50.00
APR 14% 29%
Finance charge $709.75 $5121.84
Pay-off time 4 years, 7 months 11 years, 11 months

There are numerous fees to be aware of - and avoid. Some issuers charge annual, application, and processing fees. The result? You may owe hundreds of dollars before ever making a purchase. Creditors who charge such fees target an uninformed population, or those whose credit is already damaged.

Forgot to pay your VISA® bill? Pre-dating your check and hoping they won’t notice is a good (but futile) try. Chances are you’ll be assessed a late fee of between $15 and $35 if you are just a day late from when your payment is due.

Over-the-limit fees are another common penalty. If you are already teetering at your credit limit, one late fee can push you over, and you will be charged an additional $15 to $35 per month until you pay the balance down.

Understanding the true price of credit before making purchases can help you make wise decisions. By keeping balances low, paying on time, and researching your credit options carefully, you can keep the costs - and aggravation - to a minimum.

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