By Eva Norlyk Herriott
In today’s economic environment, it’s more challenging than ever to manage one’s personal finances. When it comes to credit cards in particular, not knowing the basic rules of the game can be very costly. How credit card savvy are you? Take our quiz to test your Credit Card IQ.
1. As long as you make all your credit card payments on time, you can rest assured that your credit card will never go into the default penalty rate of 29.99% APR.
a) True b) False
2. The acronym APR stands for the following:
(a) Average Percentage Rate b) Annual Percentage Return c) Annual Percentage Rate
3. As long as you’re not looking to apply for a new credit card, mortgage or auto loan in the near future, your credit score isn’t that important.
a) True b) False
4. When you make a 0% APR balance transfer you won’t be paying any interest on your credit card until the offer expires.
a) True b) False c) It depends.
5. If you pay the minimum monthly payment of 2.5% on a credit card debt of $8,000 with an APR at 22.99%, it will take almost 50 years to pay off the debt.
a) True b) False
6. The most important factor in determining one’s credit score is:
a) How much debt you have (b) How much money you earn (c) Whether you pay your bills on time
7. Credit card issuers will approve consumers for the credit limit they can afford to carry based on their income.
a) True b) False
8. The minimum payment on credit cards can change at any time, even if the balance on the card stays the same.
a) True b) False
9. A credit card with a 0% APR balance transfer offer will always the best credit card deal to choose, if you can get approved for it.
a) True b) False
Credit Card IQ Answers (Scroll Down)
1. (b) False. Many credit card companies include a clause known as the “universal default clause.” Under this clause, the card issuer has the right to apply the default penalty rate if the card holder is late with any other payments, be it on another credit card, a car loan, or a mortgage.
2. (c) Annual Percentage Rate. The APR is the annualized percentage interest charged on credit card balances carried over from month to month, or put differently, the cost of the loan you’re taking out on the card.
3. (b) False. Like it or not, your credit score doesn’t just determine whether or not you’ll get approved for a loan or a new credit card. Your credit score also affects whether you’ll be able to rent a home, how much you’ll pay for car and life insurance, and even how competitive you’ll be in the job market.
4. (c) It depends. The 0% APR will apply to the balance transfer only. Other charges made to the credit card, such as purchases, previous outstanding balances, and cash advances accumulate interest at the standard APR for purchases and cash advances.
5. (a) True. If you pay only the minimum monthly payment due each month on high interest debt, it will not only take a very long time to pay off the debt, it will also be very costly. In this example, it would take 49 years and three months to pay off the debt with only the minimum payment. During that time, you’d have paid $25,340 in interest charges!
6. c) About 35 percent of the credit score is made up of your payment history, i.e. whether or not you pay your bills on time. How much debt you have is a close second, making up 30 percent of the credit score.
7. b) False. Card issuers mainly look at credit scores and credit reports when people apply for a credit card. They are less concerned with how much credit the person already has available. This means that it’s easy to end up with a much higher total credit limit on credit cards than one can realistically afford to carry.
8.) a) True. If the card issuer increases the interest rate on the card, the minimum payment due will also go up. For example, if the interest rate is increased from 10.99% to 22.99% APR, the minimum payment due each month will almost double.
9. b) False. A 0% APR credit card can be a good deal, but it depends on the terms offered. Most 0% APR charge a high balance transfer fee of 3-5% of the amount transferred. If the length of the balance transfer offer is only three months, as is increasingly common. That is the equivalent of paying 12-20% interest annualized for the balance transfer. Not such a great deal after all.
Scoring
0-3: Reading up on some credit card basics might not be such a bad idea. It could save you a lot of money over time.
4-6: Not bad, but not great either. Consider increasing your credit card IQ by increasing your personal finance knowledge.
7-8: Your credit card IQ is up there—keep up the good work!
9: Great! You have an exceptionally high credit card IQ.
