Five Credit Card Traps to Avoid
Credit card debt is one of the top causes of bankruptcy and financial distress in America, but it doesn’t seem to curb the number of people who have cards. The reality is that many Americans use credit cards, but very few actually know how they work or how much money they lose to interest and various fees. This math-challenged mentality is what the credit card companies count on, so don’t be one of those people who falls victim to credit card traps.
For example, do you know how long it would take to wipe out $2,000 of credit card debt if you only made the minimum payments? Depending on your interest rate, it could take up to sixteen years! Most people don’t view credit cards in this light, which is why they are dangerous. If you pull out the Terms & Conditions for your major credit cards, you might find it difficult to wade through the confusing language, and consumer advocates have been trying for years to get financial institutions to make the terms easier to understand.
Credit Card Trap #1: Subject to Change
Unfortunately, that attractive set of terms you were sent when you first signed up for a credit card may all but disappear within a few months. Many card issuers include a “subject to change” clause in their contracts that allow them to change their interest rates and other fees at any time and for any reason. You will be notified by the change but using the card is your agreement to the new terms, so you don’t have much recourse.
If you receive notice that your card’s terms are changing unfavorably, your best bet is to call the issuer and explain that you are unhappy with the new changes. If you’ve had a positive history with the company and always pay your bills on time, you might be able to negotiate them back to the old rate. If not, it might be time to retire that card and look for a new one.
Credit Card Trap #2: Over and Over and Over the Limit
Most people know that they will be charged an over-limit fee if they exceed the amount of credit they have available on a card. What you might not realize, however, is that the card issuer can continue to charge you that fee each month until you pay it down below the limit. A man in Ohio was once charged forty-seven consecutive over-limit fees, after which he received a public apology from the Chase bank CEO.
If you find that you are over your credit limit, call your card issuer immediately and explain that you will pay it down as quickly as possible. If you are able to make an immediate payment, request that they waive the fee. If you are a good customer, they will probably comply.
Credit Card Trap #3: To the Penalty Box with You
Penalty rates are actually growing in popularity with credit cards. When you pay your credit card bill late or go over your credit limit, the card issuer has the right to raise your interest rate, sometimes to more than 20%. This can be quite a shock if you are used to a 10.99% APR and suddenly realize that your credit card bill has gone up 22.9%.
The credit card company assumes that you present a higher risk financially when you make a mistake with your bills or fail to pay a bill on time. Since they have re-assessed your risk level, they feel justified in increasing your interest rate, even if you have a stellar payment history in the past. Even worse, most customers can’t get a reduced interest rate for at least six months, and the reduction isn’t automatic. You have to request it over the phone.
Credit Card Trap #4: Payment, with Interest
Two-cycle billing is another credit card pitfall that most consumers don’t understand. Even large banks such as Capital One and Bank of America use two-cycle billing to maximize the interest they are able to collect. Essentially, this practice means calculating interest based on two billing cycles instead of one. If you pay part of your bill on time, interest is calculated on both the outstanding balance and the money you paid.
This particular clause is usually buried in the Terms & Conditions and usually escapes the attention of cardholders. If you find that your issuer is charging you based on two-cycle billing, it might be time to get a new card.
Credit Card Trap #5: Universally In Debt
The universal default clause is one that many consumers have protested, but it has yet to be discontinued by credit card companies. Universal default means that if you default with one creditor (make a late payment, go over your limit, fail to make a payment, etc.), other creditors can raise your interest rate under the assumption that you present a higher risk.
As you can see, there are plenty of reasons why credit cards can get you into trouble. Avoid the above common pitfalls, however, and you’ll have a much easier time with your credit cards.