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With credit cards, beware 'balance payoff' trap

Your credit-card debt is always higher than the statement says it is if you're one of the millions of Americans who carry a balance every month.

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At last count, 61 percent of Americans carried a balance, making 61 percent of statements just a little bit off.

This truth starts to matter when you decide to pay off all your debt and realize that it's harder to get to zero than you thought.

Even if you pay off your entire balance, as listed in plain black print on your statement, you may still be socked with interest in the month after you supposedly got rid of your debt.

That's what happened to an Iowa City woman, who racked up "a huge credit card debt" from moving.

"I only had the debt for about two months," she explains, "and when I got my first paycheck, I paid it all off at once."

But she wasn't really finished paying.

"I was being charged about $30 a month to carry a balance on my card, and the month after I paid the balance off, I also got charged around $30."

Your statement's out-of-date
What happened to her is that she simply read her statement. But that bold-print number on your statement, called the "payoff balance," is obsolete by the time it reaches your mailbox, consumer credit advocates say.

"It's like a newspaper," explains Kevin O'Toole, education director for Consumer Credit Counseling Services, the financial-services division of Family Services, a local nonprofit agency in Cedar Rapids, Iowa. "As soon as it's printed, it's old news."

O'Toole explains how that affects consumers.

"If I have an account with a $1,200 balance, and I'm looking to pay it off because Grandma gave me a check, and I call the card company on the fifth of February, they'll tell me my balance is an even $1,200."

So the next day he writes a check for $1,200.

"By the time I mail it, it's the ninth. I'm in Iowa, so by the time it gets to the processing center in Hoboken, N.J., it's the 16th. By then, they add interest -- finance charges, or the cost of borrowing money.

"All of a sudden, my balance is $1,229.17. The problem you then run into is the domino theory. If my next statement says $29.17, I can foolishly say that's a mistake and throw it away. Then I'll get a late fee, too."

This isn't all the credit card company's fault, O'Toole says.

"It's easy to throw stones at issuers, but part of this is our responsibility as consumers" to know the rules, O'Toole says. "We as consumers have an obligation to be plugged in. Call and find out how long is that payoff for."

The angry phone call
Usually, people call when they receive that unexpected, after-I-paid-it bill for interest -- called "residual interest" -- plus a late fee.

"Then consumers get upset and they call," O'Toole says, "but the lender will say we won't remove the fee because we don't operate that way. They'll say it's all in the disclosure policy."

And it is, though it can be in tiny letters or convoluted legalese.

"The biggest problem I see is that consumers don't read what they sign," O'Toole explains.

How to avoid this problem
Though no credit card issuer contacted was willing to be identified by name for this story, a representative from a major credit card company explained how consumers can avoid residual interest.

Basically, it requires a well-informed phone call.

"Our phone representatives have built into their systems a calculator that will calculate the interest due. The calculator can look to the future, so if it's the fifth of the month, the representative can tell you what you'll owe on the 12th."

So memorize these words: "I'd like to avoid residual interest. Can you tell me what I'll owe 10 days from now?"

The representative says the calculator considers everything.

"That calculation will look at the balance, any credit insurance you have and any promotional rates."

So you can pop a check in the mail on the fifth with what you'll owe on the 15th. This way, you'll avoid accruing interest charges, and you'll also avoid the bigger problem of not checking the balance of a card you thought you paid off.

If you pay too much, "you'll get a credit on your account," the major issuer's representative said. And that's always better than paying too little, triggering the debt cycle again.

Know the terms
The credit-card issuer has pertinent advice for consumers -- read the terms. It's all in there.

That's what personal finance professors say, too, echoing credit counselors' mantra.

"What I do is educate our student clients to read the fine print," says Dottie Bagwell, assistant professor of personal financial planning at Texas Tech University. She runs a clinic called Red to Black, which counsels students on credit and trains financial-planning students to advise their peers. "Know before you buy, and know before you pay. Every card is different."

How the disclosure terms are displayed also varies, Bagwell says.



-- Posted: Feb. 13, 2004




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