Credit-Card-Advice.com-Advice on Credit Cards, Applications, & Interest Rates The Best Credit Card Advice & Tips on Applying for & Using Credit Cards, & Managing Interest Rates

I have 2 citi credit cards, and my wife has 1. Both of mine are the “diamond preferred” Mastercard by Citi. What is so special about that you ask? Well, it turns out that I received 3 letters in the mail yesterday (for my 3 Citi credit cards), and here is what each letter read (an excerpt):

Letter From Citi Cards Stating They Will Charge Annual Fees on Credit Cards:

Dear Mr. XXX,

We’re writing to let you know about an important change we’re making to your account. Effective April 1, 2010, an annual fee of $60 is being added.

The reason we are making this change is to maintain the quality of our service amid the rising cost of doing business. However, because we value you as a customer, we wanted to give you an opportunity to have the annual fee credited back to your account.

[...] Each year we will credit the $60 fee back to your account once you have made $2,400 in purchases during that year.”

I was disappointed to receive this letter, as I really do not use any of my Citi cards at all for purchases. I have in the past, but I just kept these open to help my credit. I like to use my Chase card for my regular purchases as I like the rewards program much better.

Therefore, it looks like I have 4 options:

1. Keep the cards and use them all to avoid the annual fee, which would be a total of $7,200 that I would need to spend to avoid the $60 annual fee.
2. Keep the cards and don’t use them, but pay the $60 fee (which would total $180 just to keep the 3 cards).
3. Use some cards to avoid the fee, but don’t use some and either cancel those or pay the fee.
4. Cancel them all, since I don’t use them anyway. Bingo, we have a winner folks.

Well, this is basically a no-brainer for me. I am certainly NEVER going to pay an annual fee on a credit card. If they need to earn money so badly, perhaps they should start with their OVER COMPENSATED CEO’s, or their luxurious office’s and buildings. Don’t you think??

The funny thing is, I googled this about Citi charging annual fees, and one website said this,

Now, Citigroup’s attempt to charge annual fees — perhaps the first time a large card lender has used such fees in response to the legislation — will be watched closely by competitors. (emphasis by me)

So their competitors are interested in knowing what will happen, eh? Well, if you are a Citi Card competitor, I will save you the suspense and wait. This is exactly what the average consumer will do (and exactly what I will do in just a few hours from now):

I am going to call the credit card company and cancel all 3 accounts TODAY, and forget about Citi. That’s right folks. Citi is a great company, but they certainly aren’t the ONLY company. As long as their competitors give me a “no annual fee” credit card, I will gladly use it. I am not going to pay to use a credit card, any more than I am going to pay to use a bank. They benefit from my having a card in many ways (by selling my info to companies, charging interest when I use it, and so forth). So if they want to get greedy, it will probably backfire fast.

If you have a citi card, and don’t want to pay the annual fee (and don’t spend enough to get the fee credited back), it may be time to pay off the credit card, or do a balance transfer.

Posted under managing credit cards

Credit cards are NOT money as we think of money, and if you view credit cards as free money, then you can find yourself getting into debt very very quickly.  So what are credit cards? Credit cards are simply loans (nothing more, nothing less) in the form of a convenient plastic card.

How Credit Cards Relate To Money

Credit cards are simply short term loans backed by a bank or financial institution. They do not represent free money, but rather, they represent a very easily accessed form of a loan. When you use a credit card, you are essentially opening a mini loan with each individual purchase, which is all consolidated into one account with one interest rate. A credit card is easy to use, and sometimes people imagine they have the full credit limit to spend as if it were free money. I assure you that is a mistake.

Imagine it this way: Picture a retail store with regular merchandise. At the front of the store, they have a bank, which can issue loans to customers who need them. So you go and shop in the store, and then you remember you left your wallet at  home. So rather than putting your groceries back on the shelf, you go to the bank at the front and say, “Can I borrow a small loan to pay for these groceries? I’ll pay you back soon”

The bank answers, “Of course.” They then take your name, and tell you what your interest rate is, and your minimum payment required each month. They tell you the money must be payed each month. That is essentially what happens each and every time you use a credit card. You are opening a mini-loan, and borrowing money which MUST be payed back.

The only difference is that the card has already an established account, with a credit limit. So you are pre-approved at any time to use and charge as many items as you want up to your loan amount. However, just because you can borrow a certain amount, doesn’ t mean you should. You should only purchase an item in which you have the funds to pay off quickly, and can afford it after all expenses in your budget.

Why Credit Cards Are Accepted at Stores Like Cash

When a bank issues you a credit card, they take a financial risk.  They assume you will pay them back what you borrowed. When you use the card at the store, the card is scanned through a machine, which alerts the credit card company that you are using the card. It is approved instantly if you are within your credit limit (in most cases).

At that point, the credit card company sends actual cash to the place where you used your card,on your behalf (electronically), and then establishes a short term loan with you. They earn money by charging you an interest rate on the money you borrowed (like all loans).

So credit cards often feel like cash because they are accepted as a form of payment like other forms of currency. However, they are not cash at all. They are loans. You are borrowing money each time, that must be payed back. So you should never go and buy a bunch of merchandise because you are approved for thousands of dollars in credit. You will have to pay for it, so if you wouldn’t (or couldn’t) pay for it in cash, you probably shouldn’t be buying in on credit.

Posted under using credit cards