How Do Credit Cards REALLY work?

Guest Author: Julie Ann Hepburn
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I often find myself answering this question. I recently found myself embroiled in a debate and conversation with my own credit card company regarding an interest charge. It was only $13.00 but I wanted to get to the bottom of this great misunderstanding and regular debate as a public service to my clients.

The following is the explanation and example, courtesy of my Citibank card services representative.

When you agree to accept a credit card, you are agreeing that you will pay the amount they are loaning you for that month [or “billing cycle”] back in full or you will pay interest on the entire amount regardless of how much you have paid [down or off]. You will continue to pay that interest until that amount is paid off. If you use the card in the meantime, say the next month [billing cycle] that will also be added on and usually to the end. So you will not be able to pay on that amount until you pay off the prior amount.

Example: January you have a credit card with a $2000 limit & 22% interest rate. You charge up $2,000 on that card during January. The bill comes at the end of the month and you pay $1,000 of that bill. February you will pay 22% on the total $2,000 because you said you would. You also agreed that you would pay 22% until that original amount is paid off. If you didn’t use the card and you paid the final $1,000 off when your February statement came, you would be paying the $1,000 plus 22% interest on the $2,000. If during March if you still have not charged more on the card you would potentially have the interest for the $1,000 at 22% interest and be done.

What About Balance Transfers?

Tragically most people don’t know this, nor do they understand that by charging more on this card the problem just continues to compound and snowball. Hence, the statement often comes up, “I should be ok because I rolled mine over to a “0%” card for 1 year [or some other specific term]. That is fine, however, there are two additional pitfalls which can [and do] significantly change this ideal temporary recovery window. First, you potentially will have to pay a fee, typically this is a percentage of the balance transferred. If it is a large balance, this will equate to a large amount. Second, if you use this [new 0%] card after you have rolled over debt from another card, you will have to pay off the transferred balance prior to beginning to pay on the new charges you have added which are accruing at whatever the assessed rate of the card will be following the “one year zero interest period” ends.

The following example is courtesy of one of my clients.

Example: The client transferred $20,000 from a high interest credit card to a zero interest credit card for 12 months. He was short on cash one evening and strictly and out of convenience, he used this [new card] for the dinner bill of $70.00 bucks. After speaking with the card services rep. he was informed of the following. In the agreement he signed for this [new] card, he agreed that the balance transfer amount would be assessed at 0% interest. However, if he uses this card the charges would “hunt to the end” or come behind the $20,000 to pay off, if you will. Meaning, the $20,000 is at 0% interest but the $70 which he could not pay off until the $20,000 is paid off, is accruing at 29% and would continue to do so until the initial $20,000 is completely paid off. Only after this initial transfer was paid off, would the client be able to pay off the $70 plus interest at that point.

New Jersey Used Car Lemon Law Tips

Sergei Lemberg, an attorney specializing in lemon laws is sitting in the guest blogger’s chair today. He’s outlining some of the ways that consumers with used car lemons can get justice.

I don’t know anyone who doesn’t feel at least a little bit of trepidation when they buy a used car. Always lurking in the back of your mind is the thought that you might just be buying someone else’s troubles. Unfortunately, although every state in the nation has a new car lemon law, few states have lemon laws covering defective used cars. Luckily, New Jersey is one of them.

New Jersey's Used Car lemon law requires dealers to provide express warranties to consumers who buy used passenger cars for personal use costing $3,000 or more, are less than seven years old, and have odometer readings of less than 100,001 miles. The law prohibits you from waiving your rights to a warranty if the odometer reading is greater than 60,000 miles and the waiver is in writing.

The length of the required warranty is based on the vehicle's odometer reading. The warranty must last 90 days or 3,000 miles (whichever comes first) if a vehicle has 24,000 miles or less on the odometer. The warranty must last 60 days or 2,000 miles (whichever comes first) if a vehicle has between 24,001 and 59,999 miles. The warranty must last 30 days or 1,000 miles (whichever comes first) if a vehicle has between 60,000 and 100,000 miles.

Vehicles aren’t covered if they’re sold for less than $3,000, are seven or more years old, have been declared a total loss by an insurance company, have odometer readings of more than 100,000 miles, or weren’t purchased from dealers.

According to the law, the dealer has to fix problems associated with the engine, transmission, and front- or rear-wheel drive (although you’re required to pay $50 for each repair attempt). The car’s considered a lemon if the dealer doesn’t fix the problem after three attempts, or if the vehicle has been out of service for a total of 20 days while the dealer is trying to fix it.

If you think you have a lemon, it’s best to consult with a lemon law attorney who can explain all of your options, as well as the settlement you might receive.