A Better Way to Manage Your Everyday Money - Book - Page 96
The risks
Charging purchases and borrowing cash with credit cards can be a nice convenience, but using
credit cards involves risk. Avoiding the risk requires effort on your part that can more than offset
the convenience. Avoiding credit card risk requires:
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Keeping track of your card usage
Reconciling your monthly statements against your record of card usage
Disputing fraudulent charges on statements before the 60-day deadline
Paying the statement’s new balance each month to avoid accruing interest
Making payments on or before the statement due date to avoid late fees
Understanding how refunds are processed
Creating and adhering to a payoff plan when a credit card balance gets large
Not putting in the effort to avoid the risks of using credit cards can cost you a lot of money as
well as damage your credit. Using a credit card and making the minimum payment each month is
the worst, most risky and expensive way to use a credit card.
Even if you pay the statement’s full new balance each month, you are still at risk of paying for
fraudulent charges posted to your account if you don’t bother to reconcile each statement. For
example, one of our credit cards began showing a $95 charge each month from a company that
neither I nor Lois had ever done business with. I disputed the charges each month to remove
them from our account. We discovered the source of the charges one day when Lois opened a
piece of third class mail. It was from a travel company in Florida that said we would be charged
$95 each month for the service they offered unless we contacted them to discontinue the service.
We contacted them but the charges continued. The credit card company was unable to refuse or
block the charges. The only way we had to stop the fraud was to close the credit card account.
Cash advances
Many credit cards allow you to get cash within a specified limit. A cash advance can be taken at
an automatic teller machine (ATM), through a bank withdrawal, or using cash advance
convenience checks provided by the credit card issuer. An advance from a credit card is a
short-term, expensive cash loan that must be paid back.
Cash advances show on credit card statements separate from purchase transactions, but are
included in the statement’s new balance amount. Cash advances, normally with an interest rate
that is higher than the rate for purchases, are processed and reported separately. While interest is
charged on purchase transactions only after a statement balance has not been paid in full, the
interest on cash advances starts to accrue on the day the cash is dispensed.
Credit card payments are usually applied to a cash advance balance first because of the higher
interest rate. This can result in an entire payment being totally applied to the cash balance with
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