Financial institutions are looking to boost revenue by raising fees and interest income from the lucrative credit card sector. And that could be bad news for unwary customers.
Already, many cards carry default and penalty rates, which can be far higher than their introductory rates and regular rates. The punitive rates, which boost revenue for card companies, can come into play if you miss a few payments, exceed your credit limit or experience a slip in your credit score.
In the time it takes to bounce a single check, the rate on your outstanding debt could skyrocket from 12% to more than 25%.
A number of other credit card tricks can inflict financial harm on you and your family. Among them:
- Low introductory rates that many cards offer prospective customers aren't guaranteed. The actual duration of the introductory period and the balance to which it applies are subject to a case-by-case review of each applicant.
- Some regular rates are pegged to a few percentage points above the prime rate or a lender specified index rate. That's good news when rates are low -- as they are now -- but could pose a problem if rates rise as the economy recovers.
- Other regular rates claim to be fixed, but even those aren't necessarily set in stone. The Bank of America (BAC) - Get Bank of America Corporation Report announced back in February that the rates paid on a number of their consumer cards were doubling to as much as 28%.The rate hike even affected consumers who made all of their minimum payments on time, and had no change in their credit scores. Bank of America spokespeople say that the hike was a result of standard review practices that indicated higher consumer risk in some cases.
So what should a consumer do to avoid paying too much for their credit cards?
Do your research.
Read the fine print on your card agreements. Pay close attention to the table that outlines the various fees and rates payable on the card. (The table, called the Schumer Box, is mandatory, thanks to the Federal Truth in Lending Act.)
The table makes it easy to compare the rates and fees of one card to the rates and fees of another. But look closely to see how and when those fees apply:
- Universal Default: Most companies now include this clause. It means they can raise your rate if you miss a payment or default on any of your other accounts -- even if your credit card is in good standing.
- Double-billing (two-cycle billing): Some cards calculate the interest you owe based on the balance you carry over the two prior months. This method ends up charging you more interest than standard billing (interest based on the average daily balance of the current month).
- Set-up fees: Some credit card offers bury fees such as a program fee ($100), set-up fee ($50) and participation fee ($75) deep in the fine print.
There are enough choices out there that you should be able to avoid cards that subject you to extra fees and other punishing terms -- but only if you read the fine print.
Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.