Credit Cards for Dummies?


Use With Caution

Credit Card Disclosure

Over half of Americans don’t understand what percents are or how they work. They might think they do, because they can tell you 50% means “half”, but they can’t answer the very easy question of how much 25% of 8 pennies is.

Half of Americans can’t read well enough to really understand what they’re reading.

People who can’t read well or can’t understand what a percent is cannot understand today’s “disclosure” documents when they take out a loan. A disclosure document is the piece of paper that says you understand the rules for borrowing money, and you understand what might happen to you if you don’t pay it back, or don’t pay it back quickly enough.

But if you can’t read well, or understand math well, you do NOT understand what might happen when you borrow money with interest due.

(That includes when you get a credit card. Every time you use a credit card, you are borrowing money.)

The only way to be fair to all Americans–the ones who read and do math well, and the ones who don’t–is to write the clearest disclosure papers ever (and to start educating our children in math and reading when they are preschool age instead of waiting until it’s harder for them to learn).

YOUR LOAN

We are loaning you our money so that you can buy something you want now, even though you don’t have enough money now.  You’ll have to pay us back not only the money we loaned you, but also extra money.  Interest is name for the extra money you will have to pay us back.

Interest uses a percent, or interest rate.  Different percents work different ways, but here is one example: If you borrow ten beans, and the interest rate, or percent, was 10%, you would have to pay back ten beans plus one more. If the interest rate was 20%, you’d have to pay back ten beans plus two more.

What if the interest rate was still 20% but you borrowed MORE beans?

BEANS   Extra Due (Interest Rate 20%)
10                       2
20                       4
30                       6
40                       (How many extra beans do YOU think?)

The more you charge on your credit card (the more money you borrow from us), the more interest you’ll have to pay us.

Let’s say your interest rate is 9.99%.  That looks like a big, scary 999% but the . after that first 9 means it is really very close to 10%, so let’s pretend it is.  At 10% interest, if you charged, or borrowed, $100, you’d have to pay us back $100 plus ten dollars extra in interest.  But if you charged $1,000, you’d have to pay us back $1,000 plus ONE-HUNDRED dollars in interest.  You can see that interest really adds up when you charge a lot. 

If you don’t pay your whole bill every month, you’ll have to pay even more interest: You’ll pay interest on any new charges, just like always, but you’ll also have to pay more interest on the leftover billed amounts you haven’t paid for yet–the ones from last month that ALREADY had interest amounts added in to them last month!

That’s right: The credit card company charges you interest on interest. Yes. We calculate interest all over again on the same money we calculated it on last month, and add that NEW interest in on top of the OLD interest that was charged for the same borrowed amount!

There are different kinds of interest and different ways of computing it, but this gives the main idea.

We can change your interest rate, or percent, each month if we want.  Sometimes, the more money you owe us, the more we will raise your interest rate, so that your Total Owed, or debt, grows bigger even faster. This can feel scary if it happens to you when you owe a lot on your credit card.

Besides interest, if you pay a credit card bill late, or even if you pay on time but pay less than the “Minimum Payment” amount shown on the bill, you’ll have to pay us late fees as a punishment for paying late. (This is because when you pay your bill late, it costs our company money, so we charge you extra money in late fees–that seems fair to us.)

Interest and late fees can make your credit card bill get high very quickly.  Try to pay your bill on time and pay everything you owe all at once.  If you can’t, try to stop buying things using your card until your your whole bill is paid off and your Total Owed is $0.   Sending extra payment amounts—even small ones—helps pay your debt faster.  Some people send their tax refunds.

To Think About:

If you do have any extra money sitting in a savings account (money not being used for everyday needs, or reserved for emergencies), that money is not being saved.  It is being lost.

Until all credit card debt is paid off, saving money is losing you money. That is because what a bank pays you in savings interest is never as much as what a credit card costs you in interest and fees for the money you’ve charged (borrowed) from the credit card company.

(Figures below totally bogus–just used for an example.)

.

The Reveal Card
Total Owed (Debt):
$10,724.23                                                                           (CALCULATIONS AT BOTTOM)
Payment Due Date:
April 23, 2011
Payment Choices:                                                               (ESTIMATES)
$10,724.23 will pay your entire debt now
With No New Charges:
$     1,281.90      a month will pay off your debt in 1 year. 
$        742.56      a month will pay off your debt in 2 years.   
$        299.99      a month will pay off your debt in 3 years     (“MINIMUM PAYMENT”)
$      199.99     a month will only keep your debt the same size.
Any less than that will make your debt grow bigger, and,
If you keep using your card, even BIGGER payments will be needed.
____________________________________________________________
CALCULATIONS
A.  $aa,aaa.aa   Still unpaid from your last bill
B.  +  b,bbb.bb  New charges for this month (the “posted” ones we know about) 

C.  $cc,ccc.cc    Unpaid plus new charges 
D.  +    _  ii.ii  The interest amount we’re charging you (cc,ccc.cc  X  pp.pp%)

E.  $10,724.23   Your new total debt, or Outstanding Balance

Your card’s interest rate, or percent, is now pp.pp%.  Your card uses the average daily balance method to calculate the amount on line “B.”. 
(All your charges for the month divided by the number of days in the month).

(Orig. posted 4/22 on Blogger)

edited 2013/11/22 to add an excerpt, try to improve readability

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2 Comments

  1. This should be required reading for anyone entering college taking out student loans. Also, I could have used a ‘mortgage for dummies’ course trying to understand those documents. (I actually did get the book and still had to ask the broker to dumb it down for me to explain the difference between the APR and the interest rate.) I think we can all agree, it is the best interest of the lender that they write the most cryptic financial hieroglyphics possible. We should be lucky they aren’t using cuneiform.

    Like

    Reply
    • Kiri, I feel like nominating you for sainthood for even reading this, much less Liking it, and now, to read your comment–you have made my day. I so wish I knew a way to get this a wider audience and make it required. I think a video version should also be required, with physical beans being pushed across a table. People are too illiterate today to get even this version.

      Liked by 1 person

      Reply

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