Top 5 List of Worst Credit Card Gotchas
by Walter Burch
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Many credit card companies continue to send the clear message that they don't care about customers. Sadly, they are making more and more money off of the financial missteps, misfortunes, and even innocent changes in a consumer's "risk profile" to trigger a growing number of "gotcha" fees and penalties that have become financially devastating to increasing numbers of cardholders and their families. It is by design that the major credit card companies are located in states such as Delaware or South Dakota that have little or no restrictions, including how much interest they can legally charge. It's important to compare credit card offers and read the fine print carefully before accepting the cardholder terms. Check credit card statements carefully, and pay charges as soon as possible to avoid late fees and penalties. Also, monitor your credit reports for any changes, because even slight changes can affect your credit card interest rates. Watch for the following "traps" common in the card industry:
- Universal Default Interest Rate Ladder - Your credit card company can double, even triple your APR due to a slight change in your credit score even if you have a perfect payment record. What's more, your new rate applies to your entire balance, not just new charges. If you see an agreement with this clause, don't accept the card. Take your business elsewhere. Chances are, you may already have a card with this clause, so beware! Your credit card company will periodically scan your credit report for one of several Universal Default triggers, such as one late payment on another credit card, your mortgage or utility, exceeding your limit on just one of your cards, a credit score that declines, taking on a new mortgage or auto loan, too much overall debt, or simply applying for credit. When do most consumers discover Universal Default? When they get their statement and begin to hyperventilate. By then, it's too late. The iron door has slammed shut.
- Outrageously High Interest Rates - Is there a law against pillaging? No, there is no federal limitation on the interest a credit card company can charge. Maybe in the state where you live, but probably not in the state where your credit card company is located and that's what counts.
- "Please Be Late" Policy - Late fees have become a cash cow for the credit card companies. So much so that many companies now mail your statement as close to the due date as possible. If you receive it only ten days before it's due, you better be on the ball or you're headed for a juicy late fee. Late fees that averaged about $13 in 1995, now average $34!
- Two-Cycle (Double-Cycle) Billing - How would you like to be charged interest on debt you have already paid off? It can happen if your credit card has double-cycle billing. This confusing average daily balance method calculates interest by taking the sum of the average daily balance for two billing cycles.
- Confounding Cardholder Agreements - Credit card issuers go to great lengths to design cardholder agreements that few people can decode. As a result, the true cost of credit cards is hidden from the consumer, until the statement arrives. If card companies insist it is necessary to care for risk by charging exorbitant rates and fees, do they also insist that they should be carefully hidden, hard to detect?
Despite all of this, credit cards can be useful to carry. They can help you track expenses, establish credit, demonstrate your credit worthiness to lenders, and even provide you with a shield of protection in making purchases. However, considering the growing level of interest rates, crippling and confusing fees, penalties, and other anti-consumer practices often used by credit card companies, they can also do serious damage to your future. The bottom line: Use credit cards wisely, pay down or eliminate your debts, and know that credit cards can be weapons of financial destruction if you're not careful.
Walter Burch is the Editor-In-Chief of CreditLearningCenter.com, a website that provides information, as well as audio and video resources to help consumers understand, manage, and protect personal credit. The site recently released a special report on the Top Ten List of Worst Credit Card Company Practices.
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