If it seems like you’re getting more and more credit card offers in the mail, that’s because it’s true: last year, bank and credit card companies mailed over 6 billion pieces of offers – enticing you to open yet another account.
To grab your attention, these mailers have much more than the zero percent teaser rate and cashback rewards. Many of them now sweeten their offers with airline miles, free computers, and so on.
The bad news is the devil is in the details – credit card offers are notorious for having teeny tiny small print that no one reads. These small prints are where the “gotchas” live!
The good news is that thanks to the Federal Truth in Lending Act introduced by Senator Chuck Schumer in 1988, bank and credit card companies must also include a disclosure about interest rates and fees, written in plain English and in big enough font-size to read. Reading this disclosure (also called “Schumer Box”) can go a long way in helping you find the credit card “catches”.
So, if you want to open a credit card account – read about some common credit card “gotchas” and catch them before they catch you!
Different Rates for Different Things
Annual Percentage Rate (APR): The Annual Percentage Rate or APR listed is what the credit card company charges for your purchases – but that’s not the only applicable rate: there may be different rates for cash advances, balance transfers, and other transactions.
Payments that you make are also used to pay off the lowest-rate balance first – so beware of teaser rates that apply only to balance transfers and not purchases. What does this mean? Say you have $10,000 balance at 18% APR, and you transferred an additional $5,000 at the teaser rate of 1% APR. Then you add $2,000 in purchases. Your monthly payment will go toward the $5,000 while the $10,000 + $2,000 remaining balance will continue to earn the bank money at the high rate.
Find out how long the low rate lasts – some cards have zero percent APR on transferred balance for a limited period of time only. After that time period, the balance will then be charged at the higher, default rate.
How the Balance is Calculated
If you get an offer for a credit card that uses two cycle average daily balance, don’t apply! This is the credit card company’s way to counter people who make multiple payments every month to make reduce their debt faster.
Fixed Rates that Aren’t Fixed
If you read the fine print “fixed rate” are actually fixed until the bank gives you 15 days notice to change it!
Find out what is the default APR – the low teaser rate can suddenly jump to the maximum rate (also called Universal Default Rate) if you make a late payment and exceed your credit limit. It may even go up if you make a late payment to a different lender (such as a different credit card issuer, or even to your cell phone company!) or if your credit score drops!
This is a disclosure from a major credit card company:
“Rates, fees, and terms may change: We may change the rates, fees, and terms of your account at any time for any reason. These reasons may be based on the information in your credit report, such as your failure to make payments to another creditor when due, amounts owed to other creditors, the number of credit accounts outstanding, or the number of credit inquiries. These reasons may also include competitive or market-related factors. If we make a change for any of these reasons, you will receive advance notice and a right to opt out in accordance with applicable law.” [editor’s note: bold added]
Fees for Everything
When you think of a bank, think of fees – that’s one way for them to make money. For balance transfers, the fee is usually 3% with a specified cap. There are also fees on purchases done in foreign currency when you travel abroad, fees for cash advances, late payment penalty as well as annual fees.
Some cards require you to pay an annual fee if you don’t carry any balance – so if you pay off your card every month, the bank still makes money off of your account!
If you think fees are small potatoes, consider this: banks assessed $16.4 billion in penalty fees in 2005 – 70% of which are late fees.
Grace Period
When a billing cycle ends, the bank will give you a certain number of days to pay before they charge interest (and late fee!) This period is called the grace period and is usually set at 20 days.
Because you have to figure in the time it takes for the post office to deliver the statement from the bank to you (and you back to the bank), you actually have much less than 20 days to pay – look for offers that have 25 days grace period.
Pre-Approved Doesn’t Mean Approved.
That low interest rate the credit card promises may not be the rate that you get. This is because that even though you’re “pre-approved” for the card, the approval itself will be based on your credit report and score – there is no guarantee that you will qualify for that rate or if you will get the card at all.
Zero Liability
In effort to assuage consumer’s anxiety on stolen credit card, Visa introduced a Zero Liability program, where consumers pay nothing for fraudulent transactions. Be aware that this program does not cover ATM transactions – so if someone used your credit card and PIN to get money from an ATM, you’re responsible for it.
Credit cards are a fact of life because they facilitate the act of buying (e-commerce would grind to a halt without it!) and provides a credit line for emergency and urgent needs. But you need to be smart about using credit cards: watch your debt level, be wary of offers that are too good to be true and catch those "gotchas" before they catch you.
