Credit Card Traps : Be Aware
- More Late Fees :- Credit card companies are reaping more profit from late fee income than ever before, because:
- The average late fee is from $12.53 to $27.61 more than doubled between 1992 and 2000.
- Companies have decreased the amount of time between when they mail a bill and when payment is due, and
- Nearly two-thirds of companies have eliminated leniency periods, (the time after a payment's due date before a late fee is assessed).
- Higher Over-the-Limit Fees :- In 2000, only one card charged a fee of less than $20 to consumers who had exceeded their credit limits. The highest fee was $35. In contrast, a 1995 survey found only one bank that charged a fee of $20 or more. Many companies assess this fee to card holders who exceed their limits by as little as $1.
- Hidden Transaction Fees :- Fees for cash advances, balance transfers, and quasi-cash transactions like the purchase of lottery tickets significantly raise the cost of these transactions. But the terms governing these transactions are buried in the fine print where consumers can easily miss them. Minimum fees, also stated only in the fine print, allow credit card companies to guarantee themselves high fee income regardless of the transaction amount. For example, if Card has a transaction fee of 3% and a minimum of $10, a card holder who receives a $50 cash advance will be charged the minimum, $10, which amounts to an actual transaction fee of 20%.
- Punitive Annual Percentage Rate (APR) Increases :- The average penalty APR—a higher interest rate triggered by a late or missed payment—is nearly eight percentage points higher than the average regular (non-penalty, non-introductory) APR. In 1998, by contrast, penalty APRs were an average of 4.5 percentage points higher than regular APRs.
- Declining Grace Periods :- While grace periods (the time during which a transaction does not accrue interest) historically were a full month long, they now average 23 days. Some cards have no grace periods at all.
- Introductory APRs :- Fifty-seven percent of card offers advertised a low introductory APR. The average introductory APR was 4.13% and lasted an average of 6.8 months. But credit card companies use low, short-term introductory APRs to mask regular APRs that are an average of 264% higher. These sharp rate increases are not prominently disclosed.
- Low Minimum Payments :- Low minimum monthly payments are designed to sound attractive to consumers, but they encourage card holders to pay more in finance charges as the length of time required to pay off a balance increases significantly. Credit card companies have decreased minimum payments in recent years from the historic industry standard of 5% to a current standard of 2% to 3%.
- "Fixed" APR :- Despite their name, so-called "fixed" interest rates can be raised with as little as 15 days notice to cardholders.
- "Bait and Switch" Credit Card Offers :- Direct mail credit card offers generally advertise the premium card the bank has to offer, yet the fine print includes the caveat that the company can substitute a lower-grade, non-premium card if the applicant does not qualify for the premium card. The lower-grade card costs more and offers less attractive terms, facts which are rarely mentioned in the official disclosures of the offer.
- Tiered Pricing :- This new, anti-consumer practice is catching on quickly with credit card companies. In an offer, the company quotes a meaninglessly-wide range of possible APRs: Providian's Aria card, for example, quotes a range of 7.99% to 20.24%. The company then assigns an APR to each applicant once the card is issued, based on the applicant's credit history. Consumers are thus being denied the right to know the terms of a credit card before they accept an offer.
How To Avoid These Traps?
- Read ALL of the fine print. If you are not clear on something ask someone else what they think it means. Ask an attorney friend, CPA (certified public accountant), financial planner, banker or other person in the financial industry. Chances are they will have several questions about the fine print, too.
- Don't apply for a card unless or until they tell you what your actual rate will be. This is hard because most of them are not set up to tell you. Generally you will need to know your credit scores and have a copy of your credit report handy.
Even then you are unlikely to find someone through their telephone maze that will or can actually answer your question. Try to find a card that gives you a confirmed rate before you apply. A conscientious company will first request a copy of your credit report from one of the credit bureaus before quoting you a rate.
Look on for current rates offered by various credit card companies and banks. Often smaller banks and companies offer better deals and are not as strict or hard to deal with. Check with your local banks also. At least with a locally issued credit card "you know where they live".
- Always mail your payment at least 7 days before it is due. Or try paying through the Internet. Many companies now offer that payment method. It can also save you time and stamps.
- Check your statement each month to be sure you are still at the interest rate you signed up for. If your rate has been increased, look for a late payment fee, or some other reason for the increase. Call the company and ask them why they increased your rate.
If your rate was unjustly increased (they processed the payment late or credited it to your account late, but it was not received late) then ask them to change your rate back to what it should be.
Even if you did make a late payment, most companies will reduce your rate after six months of on-time payments. But if you don't ask, they will keep you at the higher rate as long as they can.
- Min. $2,500 debt
- 2 or more accounts.
- A source of income.