Credit Card Gotchas

This blog is the first of several in which I will address the many gotchas the Credit Card industry uses to its advantage to add to its billions of dollars in revenue each year. What you don’t know or don’t understand about the fine print on your credit card contract will cost you money, so read these, and then study the fine print in your contract.

This first blog covers interest rate gotchas.

Low introductory rates – I don’t know about you, but, on average, I receive one new credit card offer in the mail each day, attempting to entice me with low introductory rates. These lower rates typically apply for 6 months up to 12 months and usually cover balance transfers. Sounds great, right? So why offer these low rates? Credit Card companies are seeking “revolvers”, those over one million consumers who carry a balance on their credit cards each month. Creditor statisticians have determined that the average debt-carrying consumer will continue to charge new purchases and won’t pay off his/her balance during that introductory period. They are hoping you will transfer your balances from competing cards to their card so they can earn the interest on those old purchases you’re still paying on, along with all future purchases. Here is how they expect to make their money:

First, the issuer benefits from the balance transfer fee it charges. The average fee is 3% of the amount transferred. Some issuers limit the fees to $75, but a growing number are doing away with the limits. This means that a transfer of $10,000 could cost you $300 in fees alone.

Second, most issuers only grant a "grace period" on purchases if you have completely paid off your previous balance. If you transferred a balance to take advantage of the low introductory rate and you don’t plan to pay off the balance until the end of the introductory period, say 6 months, interest charges will begin to accrue on each new purchase from the day you buy them.

Third, issuer terms usually state that 100% of each payment you make is applied to the balance with the lowest interest rate. Since your new purchases are typically subject to a higher interest rate, they will be the last in line to get paid off. Your payments will be applied to that balance you transferred instead of toward your new purchases. So your new purchases will sit there, building up interest at the highest rate, and you can't stop it without paying off the balance transfer in full, the very balance you had hoped to pay off over time. The only way around this is to take out the low introductory rate card and use it exclusively to pay off your old balances. Make all new purchases on another card until the old balance is paid off. Focusing only on the introductory rate without reading all the terms and conditions could leave you paying more in interest and fees than you did on your old card.

Fourth, if you don’t pay off the balance transferred during the introductory period, once the period ends, they start making higher interest on that left over balance, along with all your new purchases.

There is one more potential gottcha buried in the fine print. If you happen to be late on your payment for any reason during the introductory period, your rate will immediately skyrocket, in some cases as high as 30%. Before you sign up, be sure you know what all the terms are for that seemingly wonderful new card offer!

Interest rate that can change at any time – Unlike a conventional loan where you borrow money at a fixed rate through the life of that loan, you need to understand that the credit card companies reserve the right to change their interest rates at any time, as long as they give you 15 days notice. As the rates go up, so do your minimum payments.

No limit on interest rates – Since the Great Depression, there are no longer Federal usury laws governing the amount of interest a creditor can charge for a loan or credit cards. Credit Card interest rates currently range from around 13% for those with “good” credit to as much as 35% for card holders with poor credit or those considered to be “at risk.” Control of rates has been left up to the states, but several states have very weak or no usury laws. Look at your credit card statement and you will likely see that the issuer is located in Utah, Arizona, Virginia, South Dakota, Delaware, or New Hampshire even though you may have obtained your card through your local bank in another state. That’s because these states have no or high caps on the amount of interest creditors can charge and it is the issuing state’s usury law that sets the limit regardless of where you, the card holder lives.
Universal Default Clause – Even if you make your credit card payments on-time, there is a clause called the “universal default clause” that can allow your credit card company to raise your interest rate if they find out that you defaulted or made late payments to any other creditor or even on a bill, such as your phone bill. This clause may also be executed if they determine your debt to income ratio to be too high. It is not uncommon for the rate to double! Again, when your rate goes up, so does your minimum payment. This clause has become standard in about a third of all credit card contracts.

Are You in Credit Card Trouble?

If you have credit card debt over $5,000, are struggling to make the minimum payments each month, take out new cards to help pay off old card balances, or seriously thought you might need to file for bankruptcy, you may qualify for Debt Settlement. Read my blog dated September 29, 2006. You owe it to yourself to check out your options for eliminating your debt.