Likely unknown to all of us, William Boyle died in May 2000 at the age of
88. "Who was he?" you ask. Don't bother to check your American history
book because Mr. Boyle's name will not be mentioned. Yet he came up with
an idea that changed the financial landscape not only of the United
States but of the developed world as well: the Credit Card.
Born in 1911, Mr. Boyle struggled, as so many did, during the
Depression selling hair tonic and other items door-to-door. After
serving in World War II, he went to work for Franklin National Bank in
New York. In 1951, he developed the Franklin Charge Card. The credit
card was born! By the next year, 750 local merchants and 28,000
customers had been signed up. And, as good ideas normally do, the
concept of the credit card spread quickly and the rest is history.
Today, it's apparent that we have not followed Benjamin Franklin's
smart advice: "The second vice is Lying, the first is running in
Debt." Between 1995 and 2000, household borrowing rose almost
60% to $6.5 trillion and in 2000 the average U.S. household had 13 credit
or charge cards and $7,500 in credit-card balances. (2)
There are many types of debt that you are likely to encounter during
your life. Common examples include credit cards, residential
mortgages, home equity loans, auto loans, education loans, loans
against your life insurance policy, retirement plan loans such as
borrowing from your 401(k) plan at work, and margin loans - borrowing
against the value of your stocks, bonds or other investments held by
Nevertheless, the type of debt that so many of us fall victim to is
credit card debt and the high interest charges that go along with it.
So let's focus our attention on this type of debt.
Important Facts About Credit Cards
Annual Percentage Rate (APR) - This is the interest rate
charged to the cardholder on the principal balance outstanding.
Knowledge of a credit card's APR makes it possible to compare a
particular credit card with other credit cards. Obviously, the
lower the APR, the lower the amount of interest a cardholder
will pay for purchases.
Calculation of Finance Charges - How the credit card issuer
calculates the amount of interest you owe is another important
feature that should not be overlooked when evaluating a credit
card. Two credit cards can have identical APRs but different
finance charges because different methods are used to calculate
The most common method used by lenders to calculate interest is
known as the average daily balance method. Each billing
period's daily balance owed is added together and the total is
then divided by the number of days in the billing period. The
result of this calculation is the average daily balance owed.
Interest is then calculated based on the average daily balance
owed during the period.
Other lenders use the previous balance method. Interest
is based on the amount owed at the end of the previous billing
Another method for calculating interest is the adjusted
balance method. Lenders subtract payments made during the
billing period from the balance owed at the beginning of the
billing period and then apply interest to the balance.
Grace Period - This is the number of days that the lender allows
for payment before charging interest. In other words, if you pay
off the balance owed within the grace period, you are not
charged any interest. A grace period of 25 days is typical. This
is a very important feature that not all credit cards offer.
Remember that the grace period is not in effect if you carry
over an unpaid balance from the previous billing period. For
example, suppose the unpaid balance at the end of the previous
billing period was $450 and you charged an additional $200 in
the next billing period. You will be charged interest on the
Credit Limit - The maximum amount set by the credit card issuer
that can be owed at any one time for purchases, cash advances,
interest and fees and charge.
Transaction Fees - Some lenders charge a fee for every credit
card transaction - either a purchase or cash advance. Remember
that if you obtain a cash advance, the general rule is that
interest charges begin immediately.
Annual Fee - Some lenders charge the cardholder an annual fee
just for the privilege of having the credit card even if no
purchases or cash advances are made.
Other Fees and Charges - These include fees for paying late or
exceeding your credit limit.
Credit card issuers make their money in three ways: the annual
fee charged cardholders, interest you pay on purchases and cash
advances, and commissions that merchants are charged when
purchases are made by you with your credit card.