May 15, 2020

Here are three reasons to read the small print on credit cards, loans and car deals

[USA Today, Getty Images]

Little expenses can bleed your bank account dry. Here are three types to be aware of.

We pay small(ish), avoidable expenses all the time. Banks make billions on overdraft fees alone. Utility companies tack on late fees if our payment reaches them two days late. We pay both a “delivery fee” and a tip whenever pizza is delivered. These expenses add up. We are often so distracted by everyday life that we don’t pay attention to them, but imagine what would happen if we did. 

Here are three expenses we should all take time to note and do whatever we can to avoid them.

1. Credit card charges 

Credit cards can be a useful financial tool. Used wisely, they help build credit, secure services (like hotel rooms and rental cars), and earn you great rewards. That said, there are plenty of credit card-related costs to watch out for. The good news is, once you recognize how much they cost, you can look for alternatives. Keep your eye on these three charges:

  • Interest charges: Carrying a balance on a credit card can cost you dearly, particularly when you pay only the minimum payment. For example, let’s say you charge $2,000 worth of goods one month. If you pay the credit card off within 30 days, those purchases will cost you nothing extra. However, if you decide to make the minimum 2% payment each month instead of paying the balance in full, those purchases will cost you a lot more. Assuming your credit card carries an 18% interest rate and you make a minimum 2% payment each month, it will take you just over 24 years to pay off the balance. Worse yet, you will pay $4,397 in interest. Your best bet is to pay your credit card off in full each month. If that’s not possible, don’t just make the minimum payment. For example, if you instead paid $50 each month, it would take five years and 2 months to pay off. And you’d pay $1,077 in interest – that’s $3,320 less than you would have paid by making only minimum payments.  
  • Cash advances: If you ever find yourself in a pinch and decide to take a cash advance, you may end up paying far more than expected. In addition to a cash advance fee, you will be hit with a higher interest rate on the cash portion of your debt. And because interest begins accruing the day the transaction clears your account, you will have no grace period during which you can avoid interest by paying the balance in full. A better option may be to take out a short-term personal loan with a low, fixed rate and pay it off as soon as possible. 
  • Changing rates: There are a number of circumstances when a credit card company can increase your rate – meaning you’ll pay more interest on your purchases. For example, if your credit score drops for some reason and you have held the card for over a year, your credit card company can give you notice that it is raising your interest rate. If this happens to you, you have the right to close your account or try to negotiate with your card issuer. Make sure you make payments on all your debts in full and on time each month. In other words, don’t give your credit card company any reason to worry that you may not pay them as agreed. 

2. Personal loan fees

Personal loans can be an awesome weapon in your financial arsenal. They are a great way to consolidate high-interest debt, finance a home project, or otherwise meet your financial obligations. Even so, there are things to look out for. 

  • Origination fees: Make sure you factor in the cost of origination fees – often 0% to 5% – when deciding if a personal loan is right for you. You should also watch out for late fees and, if you may want to pay off your loan early, make sure to choose one that does not charge a prepayment fee.
  • Personal loan scams: Be wary of lenders who offer no-credit-check loans or demand upfront fees for processing your loan. If you are worried about your credit, look for a legitimate loan company that specializes in loans for bad credit.

3. “Buy here, pay here” car dealerships

Buy Here, Pay Here dealerships work like this: Buyers (normally with low credit scores and trouble qualifying for a traditional auto loan) find a car they want on the dealership lot. The important thing to remember is that Buy Here, Pay Here outfits are expensive. 

The average interest rate at a Buy Here, Pay Here lot hovers around 20%, far more than you would pay through a traditional lender. They often charge more and lend more than the car is actually worth, meaning you’ll owe more than the car’s value. And, unlike traditional lenders, not all Buy Here, Pay Here dealerships will report your payments to the credit reporting agencies, which would help to build your credit score. If you’re going to take out a loan, the least you should expect is the opportunity to build your credit.  

It can take vigilance to avoid everyday expenses. You can save money through simple acts, like checking receipts when you leave a store, setting up auto payments so your bills are never late, and keeping a portion of your emergency fund in checking so your account is never overdrawn.

After all, it’s your money and it’s worth protecting. 

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