Do You Know These 9 Credit Card Traps?
Having a credit card is one way to make online purchases and build up credit. And if you are careful not to spend beyond your limit or miss monthly payment deadlines, you should be fine… at least, for the most part.
Some credit card companies have ways to trick you into paying more, even if you are responsible with your credit usage and payments. Here is a list of credit card features that can trap you.
1. Cards with 0% interest
Have you seen advertisements for credit cards with 0% interest rates? It sounds too good to be true, and it sort of is. Credit card companies make most of their profits from interest and penalty fees, so what would be in it for them? The answer is drawing in consumers to sign up for a credit card and getting them to charge up debt. The 0% offer typically only lasts for a few months. After that, expect to pay interest – a lot of interest. Before signing up for one of these cards, read the fine print and ask about the interest rate the credit card company charges once the 0% introductory rate expires.
2. Cash Advance Fees
If you need cash, you can usually withdraw money from an ATM using your credit card. However, doing so means you are taking a cash advance and that you agree to pay a much higher interest rate (typically between 24% and 29%) on the funds you withdraw in a cash advance transaction. Plus, there is usually an additional fee on top of the interest, which is about 2% to 4% of the amount advanced. If the higher interest and expensive fee weren’t bad enough, cash advances often are without grace periods (meaning the interest accrues right away). Cash advances might be helpful in emergency situations, but the costs usually far outweigh any benefits.
3. Convenience Checks
Most credit cards offer convenience checks that enable cardholders to write out checks for purchases and expenses using the available balance on their credit card. These checks may be considered cash advances and carry the typically expensive fees, high interest and lack of grace period normally associated with cash advances. Although they look like a check from your checking account, any amount paid with these checks is added to your credit card balance with all the costly disadvantages of cash advances. In addition, sometimes the checks are treated like balance transfers whereby you’re required to pay an upfront transaction fee (typically based on the value of the check) followed by a short promotional period with low interest rate. Of course, just like with 0% interest rate promotions, the low promotional interest rate on balance transfers is usually short lived and replaced by a much higher interest rate after just a few months.
4. Universal Default Accounts
Believe it or not, you could get charged more on your credit cards because you were late on, for example, your phone bill. If your credit card agreement contains a universal default clause, this means that the creditor may raise your interest rate if you were late with a payment on a totally unrelated bill. The other account does not even have to be a big item, like a mortgage, but something as small as a monthly utility bill or another credit card bill. The creditor justifies this by saying that missing another payment reflects the probability of being a credit liability. Be wary of universal default clauses in credit card agreements. Thankfully, some credit card issuers understand how unfair universal default clauses may be and are slowly removing them from their credit card agreements.
5. Credit Card Theft Insurance
Some credit cards offer theft insurance (which typically costs $25 to $50 a year), but this insurance is usually unnecessary. Federal law limits your liability to only $50 if your card is stolen and used fraudulently. Sometimes, you do not even pay $50 in case of theft. Also, you may already have some protections guaranteed in your agreement. The number of credit card theft victims is rising, so it is an important issue. If your credit card is stolen, you should report the missing card or mysterious charges as soon as possible. You might not benefit from paying extra for unnecessary insurance.
6. Fixed Rates That Are Not Really Fixed
Even if you always pay on time, some “fixed rates” can actually change at any moment. The credit card company is required to inform you of the change and you may be able to reduce it by calling the credit card company. One study by the U.S. Public Interest Group* revealed that 56% of consumers who phoned in to request a lower interest rate were successful.
Because competition in the industry is fierce, the company may be willing to lessen your interest. Here’s a TIP: Just tell them in a polite phone call that you have received other offers with lower annual percentage rates. (Considering how much credit card solicitation you receive in the mail, this is probably not much of a stretch! If you opted out of credit card solicitations, you still have access to online credit card offers through various credit card offer comparison websites.) Even though the bottom line for these companies is profit, they do not want to lose an account. Some will be inclined to scale down interest to keep your business.
7. Shorter Grace Periods
A grace period is the amount of time between a statement date and the payment due date. It is also the period in which you do not pay interest. However, some credit card companies are decreasing the grace period from 25 days down to 20 days. This means that by the time you receive your bill, you may already owe interest if you carry a balance. If you plan on paying off the balance each month, check to see if your card has a reasonable grace period. If your credit card includes an online account, check your account regularly and pay off your balance as your charge purchases to your card. This will help you avoid paying unnecessary interest charges.
8. Two-Cycle Billing
Two-cycle billing is when your monthly interest is calculated on the average daily balance of two billing cycles instead of one. This tricky practice can trip up consumers who intend to pay off their outstanding balance every month. In simple terms, if you paid off your balance last month, with one-cycle billing, you would not owe interest. But with two-cycle billing, if you made any purchases in the last billing cycle and you paid off the balance, you would still owe interest because it will calculate last billing cycle’s purchases in the interest charges for the current billing cycle. Two-cycle billing is designed to force those who pay off their balances to pay interest anyway.
9. Increased Foreign Charges
Using debit and credit cards overseas is getting more expensive. Visa and MasterCard already charge a 1% fee for currency exchange, and now some banks are issuing a 2% fee for debit and credit card usage. Some banks are also levying fees of $1.50 to $3.00 for every time a consumer uses an ATM abroad. With all this in consideration, it may be worth the trouble to change currency when you’re in a foreign country. Most currency exchange offices charge a small fee for changing your money, but it is usually much less than the fees association with plastic currency exchanges.
Be a Smart Credit Card User
If you have been good with your payments on a credit card and you have experienced one of these sneaky features, there are other options out there. Competitors are quick to snatch new customers, so look out for better deals if your current creditor is giving you too much of a hassle. Follow these general tips to keep yourself out of these credit card traps:
- Shop around for a card with better features or call your creditors for a change if you have good credit but a bad credit policy. You may persuade them to alleviate the situation by reducing a high interest rate.
- Call customer service if you have a question about an interest hike or a new finance charge. Some companies will try to get you to hang up in frustration after waiting on hold or getting disconnected. Keep trying! Persistence pays off.
- Always read the agreement before you sign up for a credit card. This is the best way to prevent getting caught in a credit card scheme.
- If you do get a new card and transfer the balance from a high-interest card, be sure to keep the older card account open.
- Choose a credible debt resolution company to help you if you are unable to pay your credit cards. Debt settlement may be the right debt relief option if you are unable to repay your unsecured debts. Learn more about Debt Shield’s debt settlement program.
