Ten Top Tricks That Credit Card Companies Play
Every week, members receive credit cards offers by the dozens. But what you need to know behind that “too good to be true” low interest rate is some of the tricks the companies use to increase your rate and apply fees after they lure you in. Read and understand the fine print. By law, all disclosures must be clearly printed on all credit card applications.
- The Universal Default Penalties. Card issuers regularly check their customers’ credit reports for late payments on any of their bills. Any late payment can be used as an excuse to trigger a hike in your credit card interest rate, even if you have never made a late payment with that card issuer.
- Bait and Switch Offer. Direct mail offers generally advertise the card companies premium card at an eye-popping low interest rate, while the fine print says the company can issue a more costly non-premium card with a higher annual percentage rate if you fail to qualify for the premium card. Just because you applied for the card with a low rate doesn’t mean the card that shows up in the mail actually carries that low rate.
- Shrinking Grace Periods. Historically, grace periods–the time during which transactions don’t accrue interest–were 30 days. They now average 23 days, and some issuers have whittled the grace period to 20 days. Some cards have no grace periods.
- Two-Cycle Billing. While most card issuers use the standard one-month method to calculate interest charges, some use a method that calculates interest on two previous months’ balances. Companies compute charges on an average balance by adding each day’s balance and then dividing that total by the number of days in the billing cycle. Some do it on a monthly basis, but others use the average balance over the last two billing periods. If you carry balance, this usually means that you lost any grace periods on new purchases.
- Inactivity Charges. Credit card companies don’t make money if their cards are not being used. Keeping their card could incur a hefty fee, as much as $15, if you haven’t swiped that card in six months, and charges may be incurred for even shorter intervals.
- Late Payment Fees. A study by Vertis, a marketing company that researches consumer credit usage and payment habits, found that 2% of all credit card holders occasionally miss getting their payment in on time. They pay dearly. The national average is $29. MBNA, Bank of America and Providian are among the steepest chargers. Their late-payment fee is $39, according to Consumer Action. And there is yet another downside to paying late: a higher interest rate. In a survey, Consumer Action found that just one or two late payments will trigger a higher interest rate.
- Over Limit Fees. If you exceed your limit by even one cent, you can be hit with an over the limit fee of $25 to $39. Unjustly, a $39 late fee can trigger then a $39 over the limit fee.
- Balance Transfer Fees. It’s a big tease: A rock-bottom introductory rate to transfer your balance, but that tantalizing low rate may come with a steep transaction fee, 3% to 5%, for transferring a balance to their card. For example, transferring a balance of $1000 at 4% will cost you $40.
- Mandatory Arbitration. If there’s a dispute, you may have to give up your rights to your day in court of law. Your only recourse is mandatory arbitration.
- Payment Allocation. If you are carrying a balance and use use your card for purchases and cash advances, or if you are paying off a promotional rate and then add charges beyond the promotional period, the credit card company will first allocate their payment to the card that earn them the most money. In most cases, that means it will apply the payment to the balance that has the lower rate, thereby allowing the balance with the higher to accumulate and compound interest.