Does Cheap Credit mean Less Responsibility?
Posted February 17th, 2009 and last modified November 2nd, 2011
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Credit cards have become increasingly more common throughout the years and are now a standard way to make purchases for items that you may not currently have the money for. With the government slashing rates to stimulate the economy, credit card are now cheaper than ever. But do lower interest rates equal lower management?
Don’t be tricked, credit card companies may be lowering interest rates or even giving an “interest-free period,” but their main business is still making money and there are several ways that they do this that can catch you unaware.
Cash advance fees:
- Don’t take cash out of your credit card. Read the fine print on your statement and you’ll see it’s a very bad idea. Your card might have a really low rate for purchases, but if you take out a cash advance, get ready for a shock. The rate for cash advances is much higher. And there is no grace period — you start paying interest right away.
- Aside from paying a high rate on the cash you take out, you’re going to pay a fee, usually 2 to 4 percent of the amount advanced. And your payments will be applied to the lower-interest balance before they are applied to your cash advance.
Increasing your rates and fees:
- Late payments. Credit card companies may forgive a late payment, but they could still punish you by raising your rate. Let’s say you fell for the ever-changing-mailing-address trick. You call and scream until they reverse the late-payment fee. But next month, when your bill arrives, you notice you’re now being charged a much higher interest rate because you were late on a payment.
- Raising your rate for no reason. Your credit card company may use your late auto loan payment to justify a rate increase. They frequently check your credit report and look for any late payments to justify raising your rate.
- Fixed rates aren’t fixed. A fixed rate means the credit card company has to give you 15 days’ notice before raising your rate. You can call and ask them to lower it, but they don’t have to do it.
- Raising your rate for no reason. They don’t need a reason. They can just do it — it’s in the agreement. If they won’t give you a lower rate, get a new card and cancel the old one.
- Balance-transfer fees and disappearing low rates. If you’re not careful, you’ll get socked with unexpected fees and soaring rates when you transfer your balance. Before transferring a balance, ask if there is a fee. Also, ask how long the low rate lasts. Those low rates on credit card offers are usually only good for six months. If you are late on one payment, the low rate is immediately replaced with a much higher rate. Another note of caution: When you transfer a balance from one card to another, wait to see the balance appear on the new card before closing the old one.
Other things to watch for:
- “Free gifts” that cost a bundle. Did you really think they’d give you something for nothing? Throw away those offers that come in your credit card statement.
- Selling credit card theft insurance. You don’t need theft insurance for your credit card. If it’s stolen, you are often only liable for a small maximum amount – possibly only $50.
- Setting low minimum payments. It’ll take forever to pay off your balance if you only pay the minimum. Most credit card companies set the minimum payment in the range of 2 to 3.5 percent of the debt. At that rate, you could be paying for life.
- Shrinking grace periods. The grace period is the time between the statement date and the payment-due date. Many credit card companies are shrinking that time down to 20 days, meaning that by the time you get your bill, you may already be paying interest if you carry a balance.
Remember, credit card companies are in the business of making money, not just lending money. It is your job to read all the fine print and ask questions.
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