The cost of its use is high despite the reduction in the price of money by the Fed during the crisis
Tempted to accept or apply for a credit card from your favorite store to buy the end of the year gifts? To have a discount on the first purchase? Redo it. Especially if the idea is to finance the expense you make with the card, keeping the balance for months.
In these pages we have talked about the fact that short-term interest rates are again at the minimum level of 0% -0.25% since March, when the Federal Reserve wanted to launch a first round of monetary stimulus due to the COVID crisis -19.
That is, in theory the cost of using the money is zero. In fact, the return on savings in banks is very close to this very low Fed percentage. But practice suggests that things are not that cheap when you buy with cards that also use those Fed rates as a reference.
According to CreditCards.com the APR, or interannual rate, of the cards of many merchants has hardly changed and this is the case of those with the highest rates, reaching almost 30%. That’s what’s stipulated in Big Lots, Discount Tire, Jared The Galleria of Jewelry, Kay Jewelers, Piercing Pagoda, Sterling Family of Jewelers, and Zales.
In some states, such as New York, this percentage is impossible because usury laws prevent it from rising above 25%.
The study carried out by Creditcards on these rates indicates that, in general, rates move around 24.43%, when last year they were at 26.01%. The relief is not much. In the case of cards that are not from stores or have a shared brand with them, the average is 19.69%.
The lowest rates are paid in those offered by Military Star Card (10.24%), Sears Home Improvement Account (14.40%), Citi’s Costco Anywhere Visa (15.24%), Apple Card (10.99% to 21.99%, which is an average of 16.49%), and the Dillard’s American Express Credit Card (9.99% to 24.99%, with an average of 17.49%).
Although some stores, especially those that have a region with an issuer, allow the use of the cards issued in other businesses, the problem with this plastic money is that on many occasions it can only be used in the same place and use the points discounts on the same sites. That is, it does not have flexibility of use but it does have high cost.
It is important that when they offer you a card like this, they can answer the questions you have about its cost and use or that it is very well explained in the application brochure. And above all avoid accepting the offer impulsively, something that 69% of adults do or have done at some point, according to CreditCards.com.
The majority – 60% – of those who request it do so to obtain a discount or to finance a purchase in advance. Given the high interest rates for those who use it, the discount can be a mirage if the debt is financed in months because more money will be paid.
In the event that you need to finance something early, it is better to apply for a generalist card and if possible look for the welcome offers with 0% APR for months, which still exist. It gives more flexibility, it allows you to accumulate points in some cases and the interests are bearable. However, in these times of uncertainty, it is best to have a budget and get away from unnecessary credit or the one that you think you can not pay back in a short time.
Long-term debt can eternalize the payment and therefore the cost of what you have bought, no matter how much discount it may have had when you were welcomed.
The budget steps
The golden rule to keep your finances from getting derailed is to have a budget. To do this, you have to know what is being paid in and where it is being spent first. Also decide what expenses are necessary, which capricious and how much can be used for savings and / or debt payment.
The 50%, 30%, 20% rule helps manage the flow of this cash. 50% of what is entered must be dedicated to necessary expenses, 30% to expenses that are wanted and 20% to savings. Changes can be made on that but it is one of the many rules to follow. If the expense in what you need, what you want or what you should save is higher or you have to look for more income or cut costs. It is not an easy task.