Credit and Debit Cards

A Simple Guide to Credit, Credit Cards, Payday Loan, and Smart Borrowing

A Guide to Credit

With an “I want it, and I want it now” attitude, you’ll actually end up with less in the end.

Learn how to use credit wisely, without breaking your bank account or jeopardizing your future.

Understand the Terms

  • APR (Annual Percentage Rate) – the yearly cost of a loan, including interest, insurance, and the origination fee (points), expressed as a percentage.
  • Adjustable vs. Fixed Rate – Any interest rate that changes on a periodic basis. The change is usually tied to movement of an outside indicator, such as the “prime” interest rate.
  • Teaser Rate - A very low, temporary introductory rate on an adjustable rate mortgage or credit card designed to “tease” you into getting the card.
  • Credit Report - A report containing details about a person's credit history, including identifying information, credit accounts and loans, bankruptcies and late payments, and recent inquiries.
  • Credit Score - A measure of credit risk calculated from a credit report using a standardized formula. Factors that can damage a credit score include late payments, absence of credit references, and unfavorable credit card use. Lenders may use a credit score to determine whether to provide a loan and what rate to charge.

Payday Lending:A Debt Trap

Payday Lending in New Mexico

A payday loan is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday – usually two weeks. Finance charges on payday loans are typically in the range of 15 to 30 percent of the amount for the two-week period, which translates to rates ranging from 390 percent to 780 percent when expressed as an annual percentage rate (APR)!

New Mexico caps fees, restricts total loans by a consumer and prohibits immediate loan rollovers, in which a consumer takes out a new loan to pay off a previous loan, under a law that took effect November 1, 2007. A borrower who is unable to repay a loan is automatically offered a 130-day payment plan, with no fees or interest. Once a loan is repaid, under the new law, the borrower must wait 10 days before obtaining another payday loan.

A lender must also make sure the borrower does not exceed the total number of loans allowed by the statute. The New Mexico regulator keeps a database that allows lenders to check in real time against other loans, while requiring that each new loan be registered with the database. The statewide database does not allow a loan to be issued to a consumer by a licensed payday lender if the loan would result in a violation of state statute. A borrower's cumulative payday loans cannot exceed 25 percent of the individual's gross monthly income.

Credit Cards: Friend or Foe?

Who Profits from Credit Cards?

Banks make money by charging annual fees, late payment penalties and interest fees on unpaid credit card balances. If you do not pay your balance in full every month, you will be paying these types of fees for the privilege of having credit.

NellieMae.org illustrates how much a credit card really costs through an example of a student with a credit card balance of $7,000 at an interest rate of 18.9%. If this student faithfully makes the minimum monthly payment of 3% or $25 – whichever is higher, and does not charge anything else to the account, it will take more than 16 years and $7,173 in interest fees to repay the bill!

Instead of paying $7,000 for $7,000 worth of stuff, you are paying over twice as much over several years of your life. If you had instituted a savings plan, you could have paid for the object in full much sooner than paying the debt on the credit card.

Are Credit Cards all Bad?

Credit cards can be a useful tool, if used properly. First, they are necessary for renting cars, hotel rooms, and purchasing items over the internet. They are also useful in building a credit history and good credit store. You can make credit cards work for you if you pay them off every month to avoid finance charges, late fees, and interest payments. This way, you are using the bank’s money for free for a month and saving yourself money in the future via getting a lower interest rate when you really need it.

Helpful Hints for Using Debt Wisely

Credit is a commodity, so shop around to get the best deal, as you would if you were buying a car, a TV, or a house.

  • Have as few credit cards as possible, and pay them off every month to avoid interest charges.
  • Check your credit score at least once a year to make sure everything is accurate.
  • If you can’t afford to pay cash for something, you can’t afford to put it on a high-interest credit card, either.
  • Read the fine print on credit card applications and make sure you understand what you are agreeing to. Beware the fees!
  • Save up rather than making impulse purchases; your hard work will make you value your purchase even more.
  • Start having good financial habits now – it can change your future.

Cut those Cards