Americans have racked up over $800 billion in credit card debt. But the credit card industry doesn’t generate its massive profits only on charging you interest – most of their profits come from fees they charge in addition to the interest. Penalty fees alone average $113 per year for every American household. All cards charge fees. But credit cards differ greatly in the number, amount, and terms of the fees they charge. Each of the major credit card issuers has dozens of various credit card offers and options. The card that is best for your use, may not be the best for someone else. To select the card that is best for your needs, choose the best balance of interest rate, fees, and rewards based your individual situation. Bottom line – read and study the fine print.
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Balance transfer fee – Credit card offers often lure new customers with an offer to transfer the balance from your existing card, usually to get a lower interest rate. But a 3% charge is not uncommon for transferring the balance on your old credit card to a new one. That means you pay $30 for every $1,000 you transfer. Transfer $10,000 and you could pay $300 just in transfer fees, before you begin paying interest on the outstanding balance. If you are going to transfer a balance from one care to anther, look for a cap on the transfer fee. Even with a cap, you might pay $75 or more. Decide if it’s worth it. |
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Telephone payment fee – Want to use the credit card’s telephone banking service? Check the fine print first. Some cards charge a fee for using your pay-by- phone banking service. |
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Late payment fee – You could end up paying as much as $39, even if the mail gets there 5 minutes late! Some cards have a sliding scale, and for any balance over $1,000, you’re nicked for the highest fee. But a late monthly payment can cost you a lot more than a late fee - it can raise your rate immediately - and that super-low introductory rate they enticed you with is suddenly gone. |
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Annual fee – Credit cards that offer a rewards program may have annual fees as high as $135. Depending on the rewards program and your individual needs, that may or may not be an unreasonable fee. But on the flip side, many cards are shouting “No annual fee” to distract you from other fees. |
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Cash advances – Want some quick cash from an ATM? Watch out for a $10 minimum charge. Transaction fees for cash advances can be up to 5% of the advance. In addition, cash advances are usually charged a higher interest rate on the unpaid balance. |
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Over-the-credit limit – Watch your card’s balance. Charge even a $1 over your limit and you might end up paying a $39 fee.
Trap: You transfer an old balance of $10,000 to the new card, thinking you’ll get the $25,000 credit limit you applied for. You get your new card in the mail, but the approved limit is $10,000. Not realizing this you use your new card and you are suddenly over the credit limit. Bingo! Your new credit card just pocketed a quick $39. |
Card Tricks That Raise Rates:
Credit card companies feast on record profits as they push penalty interest rates as high as 30% and higher. Despite federal laws and regulations written to protect you, most credit card companies are ingenious at getting more of your money. Their methods are legal - tricky sometimes, but legal.
Jumps in the interest rate on your card can cost you thousands of dollars over the years. Read your monthly statements and special notices. You’ll discover the advertised interest rates are subject to change, often popping up to catch you by surprise. In addition to added fees, these card tricks will up your interest rate: |
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Late = raised rate – A late monthly payment can raise your rate in a flash. Remember that limited-time, super-low introductory rate you got when you transferred you balance? Gone. To minimize the chance of a late payment: mail your check at least a week in advance of the due date, and use the pre-addressed envelope. (Hand-addressed envelopes could be held up in the mailroom). |
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Cash advance = Rate Advance – Some card charge you one rate for purchases and a higher rate for cash advances. Some card companies send you “convenience” checks which you can use without additional fees or higher interest – but they’ll charge 19.99% APR if you use an ATM for a cash advance. Read the “fine print”. |
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Bait & Switch – The rate you apply for isn’t always the rate you get. For example, the application might advertise 5.9% APR. You sign up, your card arrives, and - surprise! - a new agreement with a higher rate - maybe 15.99% or even 24.99% APR. What counts isn’t the rate you apply for; it’s the rate the credit card company gives you.
Another surprise: the offer says you’re pre-approved for up to $50,000, but the agreement might come back authorizing $500. There’s a lot of wiggle room in the words “up to.” |
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Higher APR Dangers – Buried deep down in the fine print is a trap that may cost you thousands of dollars – even if you may timely payment. Many agreements “allocate your payments to balances (including new transactions) with lower APRs before balances with higher APRs.”
Example of a trap: Let’s say you take a $2,000 cash advance at 19.99% APR, and your rate for purchases is 5.9% APR. The interest on your cash advance could bury you under a mountain of debt, even though you’re paying the monthly minimum. Why? Because not one penny goes toward the $2,000 cash advance until all of your $8,000 debt for purchases has been paid for. |
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Watch Those Notices – Be advised that credit card companies can jack up their rate, or change the terms, any time they choose, with just 15 days’ notice. You won’t like it, but it’s legal. One solution: when you get the notice, stop using the card immediately and you’ll be entitled to pay off the balance at the old rate. |
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Introductory Rate – You’ve been offered a 0% introductory rate on balance transfers. But when the introductory rate’s term is up you’re left with a much higher APR (and new, hidden fees?). Is it worth it in the long run? Decide before you switch. |
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Tiered rates – Did you know that as you charge more purchases, your interest rate can jump to the next level? Stay away from tiers. Real rates are often not clearly disclosed in the offer. |
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Variable rates – Variable rates seem attractive when you sign up. They could save you money - or punish you later. It all depends on which direction rates head, up or down, and how fast. |
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Credit Rating Dip = APR Bump – Any negative hit on your credit rating is enough for the credit card company to send your APR soaring - even if it has nothing to do with your credit card. For example, if you’re late paying your electric bill, your credit card rate might go up; if you expand the credit line on your home equity loan - or take on a bigger mortgage; or take out a loan for a new car; or sign up for a store card to get its “15 percent off on Tuesdays” deal; or if you have a late payment or two on your loan at Hometown Credit Union. If you have good credit, protect it. If you credit is poor, work to build it up. |
Other Things To watch For: |
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Jumping through hoops for rewards, miles, and points – If a card promises paybacks, are they worth the price and effort? There are no hard-and-fast answers. It depends on your life choices. And whether you have the diligence to tease the true meaning from red
fags like “some restrictions and limitations may apply.” |
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Compare offers carefully – All rebates are not created equal. Some cards will give you 20 times more rebate when you buy gas, for example (and not necessarily the oil company’s card). But with that rebate may come tricks like a two-cycle billing method. Look at the disclosure box on your statement for a “method of computing the balance for purchases.” It should read “average daily balance (including new purchases). |
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Minimum payment = maximum pain – When your monthly statement comes, there’s a great temptation to pay only the minimum. Don’t do it. If you possibly can, pay the balance in full every month. Otherwise it can take years, even decades, to get free of debt. See our credit card minimum payment calculator to see how big a difference even a small extra payment can make.
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| Avoid Credit Card Debt Pitfalls & Build Your Credit |
| Following these simple guidelines will help you avoid the pitfalls of credit card debt and while helping build good credit. |
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Know your financial means and limits and don’t go beyond them. |
| Only charge items that you know you can pay off each month. |
| If you carry a balance, pay more than the minimum payment (or the most you can afford) to lower your principle balance. Try to keep your balance as low as possible. |
| Shop around before accepting a credit card offer. |
| Compare Annual Percentage Rates (APR). They range from 7.99% to 30.25%. |
| Read the fine print and disclosures. |
| Carry only 1 or 2 major credit cards. Be sure to cancel all unused cards.(Remember, your credit score is based in part on the total number of credit cards you have). |
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Keep store cards to a minimum. Avoid the temptation to get a store card just to take advantage of a 1-time special sale. |
| Avoid using your full credit limit |
| If you are making payments on several credit cards, consolidate them into a single card with a low Annual Percentage Rate. |
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Or, checkout the U.S. government's website dedicated to teaching the basics about financial education: MyMoney.gov. |
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