This article was co-authored with Bear and the Bull.
This is our final blog post for our series to help immigrants in North America learn about the banking system. We’ve covered a wide variety of topics: the different types of financial institutions, the types of bank accounts you should consider, how to build credit, and introduction to common lending and investing products.
Before we leave you, we want to warn and educate you about common banking traps. As someone who is new to the country, you might not be aware of these pitfalls. As a result, people may try to take advantage of this naivete and try to oversell you on products you may not necessarily need.
In North America, it’s normal to ask questions! Don’t feel like you have to settle for the options that are laid out for you. Even though the individual informs you of something else and it’s not the answer you were looking for, escalate the issue and speak to the manager. It’s as simple as that.
Two common banking traps are cash advances and credit card fees. If you don’t read the fine print and take the time to understand the interest rates and penalties behind these, you may end up being indebted for many years.
1. Cash Advances and Payday Loans:
Cash advances are used for short-term loans taken against the available balance you have on a credit card. Not all credit cards offer this, so you may want to double check if that’s a feature you are seeking. It’s important to note that it’s not the entire amount of the balance that you would be eligible to receive a cash advance.
For example: If you have a $6,000 balance, you may only be eligible to receive $1,500.
BUT let’s talk about the HIDDEN COSTS!
Cash advance fee- minimum flat rate or a percentage of the amount of your advance, whichever is greater. The fees can range between 2% and 5%.
ATM fee- this usually costs between $2 and $5. Both the ATM operator and your bank could charge this fee.
Interest accrues immediately- there is no grace period, a time given between the end of your card’s billing cycle and the date your payment is due.
High interest rate- the rates are higher on cash advances. So, if you ever have to take out a cash advance for any reason, pay it off ASAP!
2. Credit Cards:
When used wisely, credit cards can be a powerful tool. Read our post on it here (insert link). One of the key advantages that credit cards provide is the ability to build a strong credit score, which confers legitimacy to you in the eyes of the banks.
However, it comes at a cost! If you poorly manage your credit cards, you can quickly get into more debt than you can handle.
Here’s a preliminary guide to help you maintain a healthy credit score, and avoid falling into credit card debt:
A recent study found that 55% of Americans with credit cards have debt. If you can’t afford to pay for something in cash, you probably shouldn’t purchase it on your credit card.
Large purchases should have a detailed repayment plan.
Avoid using more than 30% of your limit.
Don’t keep a revolving balance on your card.
If you do find yourself with credit card debt, consider consolidating the debt or paying off the highest interest card first
Other things to avoid when dealing with credit cards are the following:
Avoid the balance transfer fees- if you are struggling to pay an existing debt, consider moving the debt with a low interest rate for a promotional period. This balance transfer fee is usually either 3% or 5% of the total balance.
Foreign transaction fees- when using your card overseas to make purchases, the bank can charge you between 1% and 3%. If you continuously travel overseas, it’s worth investing in a card with 0% foreign transaction fees.
Reward programs- This entices cardholders! Why? The more you spend, the more you earn points, which can be redeemed for travel, merchandise or simply cash back. However, these cards usually come with a higher interest rate on balances. Please be careful with this one! Don’t spend more to gain a reward, only to find that you’re unable to pay off your balance in full.
Promotional offers- Many banks offer new cardholders promotional offers to entice their customers to sign-up! Don’t get caught up, you’ll usually need to spend a minimum to receive the bonus points.
Revert rates- After the intro period expires (6 or 9 months), the rate reverts to the standard annual percentage rate (APR) which can range between 8% and 21%. The best way to avoid these rates is to set up a budget plan and determine how much you’ll need to pay each month to clear your debt before the 0% promotional period ends.
Staying with one card for years at a time- Why is this listed? Although it may appear more convenient, it may not be beneficial for you. You could be missing out on competitive offers. What we do suggest is comparing offers based on your needs.
Minimum repayments- If you can not pay the full amount, you are required to pay the minimum amount. The balance of the amount owed will have an interest rate applied to it. If you believe the rate you are paying is too high, another alternative is to transfer the balance to a lower credit card with a lower APR.
We have touched on two heavy topics that have many common traps under its product. Bottom line is be aware of what you are signing up for and read the fine print.