PART 1 OF 3: Published June 16, 1997		Get out your wallet and count the cards. How much plastic do you have in there? Chances are, you're carrying around more than one major credit card (Visa, MasterCard, Discover, American Express). That's not even including store-branded cards such as Sears, J.C. Penney, or Macy's cards. Each card has a different set of terms, different features, and most importantly, a separate bill. And no matter how many cards you carry (even if it's none!), chances are you've received envelopes in the mail that say "You're pre-approved for a Gold Card!" "Earn frequent-flyer miles with our new card!" or "5.9% APR if you transfer a balance now!" Being a smart credit consumer is important with all these tempting offers flying around. And judging by some recent statistics, many Americans don't take this responsibility seriously. The American Bankruptcy Institute reported a shocking 1,178,555 personal bankruptcy filings in 1996, compared to 926,601 filings in 1995, a 27% increase. Fully 95% of bankruptcy filings were by individuals, and the ABI's report stated that increasing consumer credit risk (which means people not paying their credit card bills) was a large factor in these filings. Don't panic. Being a smart credit consumer isn't difficult. All that's required is a healthy dose of common sense, mixed with the attitude of a bargain shopper. You can safely apply for credit, whether it's your first card or your fifteenth, if you remember a few simple principles. 1) REMEMBER: CREDIT IS A LOAN When you apply for credit, you are applying for a loan. A credit card isn't merely a way to purchase things; it's an obligation you carry around with you. Take it seriously. The difference between a credit card loan and a "regular" bank loan is that the latter is for a fixed amount, with the same payment each month until the balance is paid off. With a credit card you're given much more flexibility. Obviously this can be a tremendous advantage, but it can also lend a false sense of security, making it psychologically easier to spend money using a credit card — money you don't even have yet. If you find yourself depending on cash advances to pay routine expenses, you are treating your credit card like cash, not like a loan. Loans have another funny feature. When you don't pay them off, it's hard to get more of them. If you make late payments (or no payments), you may be seriously damaging your credit history — the closest thing on earth to the fabled Permanent Record. The ins and outs of monthly payments will be discussed in greater detail in part two of this series.
Do you have Credit Smarts? Join in our interactive credit card poll — and see how you stack up against other Tripod members!		2) CREDIT CARD COMPANIES LEND TO YOU BECAUSE IT'S PROFITABLE FOR THEM The first area in which credit card issuers make money off consumers is fees — annual fees, over-limit fees, cash advance fees and the like. In the continuous war for your dollars, slashing these fees is a way for the issuer to make the card look attractive to you, the consumer. The simplest step you can take when applying for a credit card is to apply for one that promises no annual fee — not just for one year, but indefinitely. All the major card issuers now make this offer routinely, so take advantage of it. The second money-making area, which is the mother lode for card companies, is charging interest on your loan balance. They can easily afford to give you the card "free," that is, with no annual fee, if you'll use their card and carry a nominal balance. Which leads us to... 3) ALWAYS READ THE FINE PRINT By law, credit card issuers must disclose interest rates and fees when they make an offer of credit. Read carefully to make sure that you won't be charged an annual fee at some point down the road, that exceptions to the rules aren't noted for residents of your state, and that your annual percentage rate (APR) is really what it seems to be. Every time you carry a balance from month to month, you are assessed a finance charge, calculated as a percentage of your balance. The APR is the simplest way of expressing this finance charge. If you have a balance of $100 which you carry for one year, and your APR is 16.5%, at the end of the year you will owe $116.50. What makes this tricky, of course, is that your balance changes from day to day, so you can't just take the balance at the end of the year and calculate the interest you'll pay. Watch for two things: the rate itself and the method of calculating the finance charge.
WEB RESOURCES: Bank Rate Monitor has the most current list of best credit card rates nationally and in major cities. Hit the Credit Card button on the home page. One nice feature: you can find a list of best credit cards for balance-payer-offers or balance-carriers. Directory of Electronic Applications: A listing of a number of on-line applications for everything from credit cards and loans to colleges. Get Smart: An impartial comparison of hundreds of credit cards — find the one that's right for you!		I've seen solicitations for cards with 7.9%, 5.9%, even 0% APR. The catch is most obvious for the last case: obviously the company wouldn't make any money if it offered an indefinite APR of 0%. Sure enough, that rate, known as a "teaser rate," is only good for three months. You can use them to your advantage if you plan to pay down balances within the term of the teaser, but transferring a balance from a card with a 16.9% APR to one with a 5.9% APR only saves you money while the 5.9% rate is in effect. Three months, six months, or a year later, when the rate jumps up again, you're back to losing money if you still have a large balance. The method most card companies use to determine your finance charge is to take your average daily balance and multiply it by your daily percentage rate (APR divided by 365), and then multiply by the number of days in the billing cycle (number of days in the month). Sounds complicated, but all you have to remember is that if your average balance is high, you're paying more interest. Most cards offer a 20- to 30-day grace period on new purchases before interest is charged, but only if you pay your balance in full. So if you carry a balance, you effectively get no grace period, and interest is levied on new purchases the day you make them. These are some of the biggest things to watch for when applying for credit. Most importantly, keep your head. The process is no different from shopping for the best bargain on a box of cereal. You are the one with the power because you are making a buying decision. applying for cards | managing credit | credit problems Wendy J. Cholbi is a writer who lives with her husband, a philosopher, in Charlottesville, VA. Although lacking a comprehensive business wardrobe, she is the editor of three financial publications (Monthly Market Report, Bank Investor, and Strategic Adviser) for SNL Securities. Read more columns by finance expert Wendy J. Cholbi. © 1997 Tripod, Inc. All Rights Reserved.