Don’t get caught in a credit card trap. You may think you know your way through the credit card jungle -- but credit card issuers have laid new traps at every turn for unwary consumers.
Some relief may be on the way. Congress recently held hearings to review fees, interest rates, grace periods and other provisions in credit card agreements. In the face of such pressure, a few banks have eased up on some of their most onerous terms.
Even so, you can’t let down your guard. Here are six ways to avoid the traps...
Credit card fees have been rising rapidly in recent years. Expect to be charged as much as $39 if you are even one day late with the minimum payment due on a credit card, especially if you have a large overdue balance. Example: American Express started charging a $38 late fee on Delta SkyMiles accounts that have balances of $400 or more. Accounts with balances less than $400 are charged a $19 fee.
Virtually all card issuers will waive the first late fee on an account if the cardholder calls and asks them to do so. (Fees for subsequent late payments are difficult to avoid.)
Strategy: Tell the customer service representative that this is your first late payment and that you want the fee to be waived. Be persistent if the phone rep resists. Threaten to take your credit card business elsewhere. If that doesn’t work, ask to speak with a supervisor and repeat your request. If necessary, call back a few days later and try again with a different phone rep.
You shouldn’t necessarily close an old, rarely used credit card account. The companies that compute credit ratings consider long-term accounts a factor in your favor. Canceling old cards can lower your credit score, which makes it harder and more costly to obtain loans in the future.
Retaining a few no-longer-used, zero-balance credit card accounts also helps keep your options open in case a card that you do use suddenly alters its terms in a way you don’t like. If that happens, you could call the customer service departments for the cards you haven’t used for a while and ask what incentives they can offer for you to transfer your balance, then start using their cards again. The issuers of those cards will likely offer you low interest rates to entice you back.
In addition to frequent-flier miles, credit card rewards programs offer gifts, discounts, cash and other perks. These programs are most appropriate for cardholders who don’t carry balances, because rewards cards rarely offer the lowest interest rates. Unfortunately, the rewards programs that look the most appealing on paper often come with the most traps, as well as steep annual membership fees.
Examples: Airline-branded cards provide frequent-flier miles, but because of increasingly overcrowded flights, these miles are very difficult to cash in. Automaker-branded cards promise rebates on new vehicles, but the dealership might play hardball when you try to purchase the car you want. Your rebate is restricted to a particular make of car, such as General Motors -- so the salesperson knows your options are limited.
Some cards offer more flexibility, but there still are catches.
Example: Capital One has a “No Hassle Miles” rewards card with no blackout dates, no annual fee, no limit and no expiration date for frequent-flier miles earned, as long as the account remains open. The miles can be used to pay for tickets on any airline, but they cannot be combined with those of any other airline frequent-flier program. Also, the required number of miles rises as the price of a ticket does. A ticket costing from $150.01 to $350 requires 35,000 miles, more than the usual 25,000 for US flights in standard frequent-flier programs... and tickets costing $350.01 to $600 require 60,000 miles.
Strategy: I prefer the simplicity of a cash-back card. These include Discover cards and Blue Cash from American Express, which rebate between 0.5% and 5% of purchase prices, depending on how much you spend in a year and where you spend it.
Credit card companies occasionally offer their cardholders interest-free, no-fee loans. This sounds like a great deal, but if you already carry an old balance on the card, there’s a catch. You still have to pay interest at the old rate on the money you already owe, and all new payments go toward the 0% interest cash advance until it is paid off.
Example: Say you have a $10,000 spending limit and a $6,000 balance on a card charging 15% annual interest. The issuer offers you a 0% interest, no-fee cash advance. You take the offer and spend another $4,000. The issuer will apply 100% of your future monthly payments toward your new $4,000 cash advance until that has been paid in full. Meanwhile, your original $6,000 balance will continue to rack up interest charges at the original 15% rate, costing you hundreds of dollars per year.
Strategy: To eliminate monthly charges at the 15% rate, first transfer your $6,000 outstanding balance to another credit card, then get a cash advance for at least $6,000 at the 0% rate on the first card. Next, use that $6,000 to pay off the balance on the second card. That leaves you with a 0% rate on the first card’s full balance. Other rate traps: Some card issuers calculate interest using your average daily outstanding balance over two months, rather than one. Even if you pay off nearly all of the balance at the end of the first month, the interest charged the next month will be based on the average over the entire two-month period. Chase Bank recently dropped this practice, but other banks have not. Also, issuers often raise rates or fees without waiting for your old card and agreement to expire.
Citi recently ended that practice, with certain exceptions, saying that it will wait until a new card is issued before making such changes. Exceptions: Citi still reserves the right to raise rates or fees if the card user pays a bill late, goes over his/her credit limit or sends a payment check that bounces.
You can face lofty fees for going even $1 over your limit. It also can hurt your credit score.
Strategies: Ask your card issuer to raise your limit... don’t spend anywhere near your limit in case you lose track... or switch to another card that grants you higher limits.
If you are late with a payment to any lender, all of your credit cards might try to jack up your interest rate -- perhaps to 30% or more -- even if your payments to most of these cards have always been on time. This universal default rate increase is hidden in the fine print of many credit card agreements. Citi recently dropped the provision, but many banks have not.
Strategy: One solution is to always pay at least the minimum amount due on time. Also, read the fine print of credit card applications closely, and favor those that don’t include a universal default provision. If you are hit with a universal default rate increase, call customer service and threaten to switch your balance to another card.
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Bottom Line/Personal interviewed Scott Bilker, author of three books about credit cards, including Talk Your Way Out of Credit Card Debt! (Press One), which contains 52 transcripts of phone calls to banks that saved more than $43,000 in interest and fees. He lives in Barnegat, New Jersey, and holds 80 credit cards with more than $300,000 in available credit and $10,000 in credit card debt that he manages at 0% interest. His Web site features articles on credit cards and other financial topics. www.debtsmart.com