Credit cards are a terrific tool as long as you take advantage of the convenience features and take precautions to avoid fraud. Still, saying “charge it” has gotten a lot of people into financial trouble. But credit cards aren’t the problem—it’s how you use them that really counts. Furthermore, all cards are not created equal. Shop around and switch to a better card. In most cases, you’ll find credit union credit cards are less expensive and more consumer-friendly. 

• They’re convenient—you get to buy now and pay back at a later time.
• They’re widely accepted so you don’t need to carry as much cash.
• When you use a credit card, you don’t need to show identification or give out personal information to make the purchase as you do when you write a check.
• The monthly statement you receive from the credit card company has a record of all your purchases, making it easy to monitor your credit spending.
• If you have problems with a credit card purchase, you have federal protections that you don’t have with cash, check, money order, cashier’s check, or any other form of payment. 

What many users don’t realize is this: A credit card purchase can be an interest-free loan if you pay in full when the bill comes due—you’re borrowing without having to take out a loan.

How do I compare credit cards to see which ones have high fees?
Look for the fees and other costs of credit cards in the credit card agreement form. Don’t sign an agreement form until you’ve read the agreement and understand all the costs, such as interest rate, annual fee, over-the-limit fee, balance-transfer fee, cash advance fee, replacement-card fee, and late-payment fee. Then, evaluate the card based on how you plan to use the card. If you always pay your bill on time, then interest rate doesn’t matter—look for a card with no annual fee. If, on the other hand, you think you may be carrying a balance from time to time, look for a low interest rate; in exchange, you may pay a slightly higher annual fee.

How can I avoid some of those high fees?
Tell the issuer you’d like a due date that’s easy to remember—say, close to payday—to reduce the likelihood you’ll incur a late payment fee. Either pay online, or use an automated bill-pay service. And if you’re charged a late fee even though you usually pay on time, call and ask that the fee be waived. 

What’s the best way to “shop” for a credit card?
Don’t wait for offers to arrive in your mailbox. Call issuers—including the credit union—and ask about the terms and conditions of the cards they offer. Compare rates and terms by reading the fine print, and understand all the fees. Watch out for low introductory rates on transferred balances. A low introductory rate of, say, 3.9% for the first year may sound tempting, but make sure you know what the interest rate is after that.

What are some of the common traps associated with credit cards?
Watch out for the minimum payment trap. If you owe $1,800 on a card with an interest rate of 18% and the minimum payment is only 2% of the balance due, it will take you 22 years to pay it off and you’ll pay $3,800 in interest costs. The actual cost of that $1,800 is $5,600.

The Federal Reserve now requires credit card bills to include information on how long it will take to pay off your balance if you make only minimum payments. Check your statement for details.

Watch out for the shrinking grace period—the time in which you have to pay the bill before the interest-rate clock starts ticking. The average grace period used to be about 30 days, but now it can be 20 days or fewer, depending on the card issuer. If you have a card with no grace period, interest is charged the minute you make a purchase. And even if you have a grace period, it doesn’t apply if you carry a balance. This means that if you don’t pay your bill in full, each new purchase will incur interest from the minute you make that purchase.

Watch for the universal default clause, which stipulates that your credit card issuer may check your credit report for late payments on any of your other bills. Some lenders use any late payments as an excuse to increase your interest rate, even if you always pay your card issuer on time.

Be aware of new credit card laws that give you additional fee protections. Under CARD Act rules, your credit card company cannot charge you a late payment fee of more than $25 unless one of your last six payments was late or the company can justify that the costs it incurs as a result of late payments justify a higher fee. For more information on CARD Act rules, visit the Federal Reserve's Consumer's Guide to Credit Cards. 

What do I need to know about offers of “90 days same as cash?”
These offers sound good, but they can lure unsuspecting consumers into an expensive contract. If you don’t pay off the entire balance within the specified time, interest—usually at a high rate—accrues from the date of purchase. 

What are the warning signs that I might have too much credit card debt?

• Making only the minimum payments on your credit cards
• Being at or near your credit limit on cards
• Not knowing the amount you owe on all debts
• Using cash advances on cards to pay other bills
• Being denied credit or a loan, or denied a credit purchase
• Getting calls from collection agencies
• Lying to spouse or family about spending 

What’s the best way to cancel a credit card?
Doing “plastic surgery” on your cards with scissors doesn’t cut it. Write to the issuer and include your account number and billing information; tell the issuer to notify the credit bureau that the account was closed at customer request. Don’t cut your card in pieces and mail it back to the issuer—someone could piece your card together and use it fraudulently.

Tip: Check your credit report after two or three months and make sure the account was closed.

If I’ve never had credit in my name, how can I establish credit?

• Request a gasoline card—they’re usually easier to get. Make sure you pay promptly and in full each month.
• Open a checking/share draft account at the credit union. Don’t bounce checks.
• Open a secured credit card account if you can’t get a regular card. A secured credit card usually requires that you provide cash in the form of a deposit account, which serves as collateral. It’s up to you, then, to use that line of credit responsibly.
• Consider using a co-signer on the first few credit accounts.
• Obtain a small signature loan from the credit union—that’s one that doesn’t require collateral.
• Offer a large down payment to get a personal loan.
• Whenever applying for credit, ask if the issuer reports to a credit bureau; if not, having that unreported credit card or loan won’t help you establish credit.
• Pay all bills on time, budget, track expenses, and have an emergency fund as backup. 

If I misused credit in the past, how do I rebuild a good credit history so I can get decent interest rates on loans in the future?
Rebuilding good credit takes time and patience. First, order your credit report and correct any errors. Make a plan to pay down your debts, perhaps with a consolidation loan from the credit union. And put your finances on auto-pilot with automated bill-pay and direct deposit of your payroll.

Over time, make sure you pay all bills on time. Apply for a small line of credit and/or a secured credit card and pay them back responsibly. As you’re paying off debts, start to build an emergency fund as backup so future unexpected expenses won’t send you back into a spiral of debt.

Finally, get help—from the credit union, or from a certified counseling agency. Some credit unions have counselors on staff or affiliations with agencies, or you can seek help from the local Consumer Credit Counseling Service. To find the nearest CCCS office, call 800-388-2227 or visit nfcc.org.

Additional resources:
Federal Trade Commission
http://ftc.gov/bcp/menus/consumer/credit.shtm

Equifax
800-685-1111
Equifax.com 

Experian
888-397-3742
Experian.com 

TransUnion
800-888-4213
Transunion.com

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Published April 21, 2008

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