Reading the credit card fine print
Credit cardholders often are surprised when
they get socked with some unexpected fees or discover when that first statement
comes that their interest rate isn't what they anticipated.
Late fees. Overdraft charges. Rate increases that come unannounced
and seemingly without cause. Old debts mysteriously appearing on new credit
Like it or not, these credit card surprises are usually completely
legal, because the card issuer warned in advance that it had the right to do
So the question for cardholders is, how do you avoid all of this
and protect yourself from unexpected charges, rate increases and the like.
The answer is one you're undoubtedly heard before -- read the
Gay Watson of Consumer Credit Counseling Service, or CCCS, of
Greater Atlanta reminds us that it's seldom as good as it seems. "Even
if the offer says zero-percent or a low-percent interest rate in big letters,
it may not apply to you. The credit card company will decide exactly what you
are 'preapproved' for when they check your credit reports or scores. The really
low rates are for the best scores."
The answer, say the credit card experts Bankrate spoke with, is
to always read the fine print. Before you sign that application and drop it
in the mail, make very sure that you know exactly what you're getting.
Perhaps the most important thing for you to remember when
you sign up for a credit card is that the companies retain the right to change
the terms at any time. They can raise rates, shorten grace periods and basically
change the relationship in ways that work to their advantage.
That's why you need to study the filler material that comes with
statement each month.
But frequently the things you wish you had known were right there
from the start, and you would have known if you'd done your homework before
you accepted the agreement.
Here are some things you may see on your credit card offers,
including some common and some less-common charges, and what they could mean
APR, variable-rate information:
The initial interest rate is often one of the large-print items stated on the
front of the offer, but how the rate will eventually change is listed on the
back and is just as -- if not more -- important.
Eric Gelb, CEO of Gateway Financial Advisors, estimates that at
least 30 percent of Americans carry the majority of their balances at the end
of the credit card's promotional rate period. "My experience and research
show that most of the promotional offers require a minimum payment or an interest-only
payment. The trouble is most people are not organized enough to retire the entire
balance before the due date."
In fact, you could get into even more trouble if you miss a few
due dates. "If you miss two payments, or are late twice, they could automatically
raise your rate," says Ray Hooper, education housing director for the Consumer
Credit Counseling Service of Greater Dallas.
The fine print will warn you which slip-ups could cause
a rate increase.
Payment allocation: If you use
your card for both purchases and cash advances, or use your card both during
and after a promotional period, then chances are you'll carry charges with two
different rates. But if you assume that your payments will pay off your highest
rate first, you're probably in for a disappointment.
Payment allocation tells how they allocate your payment in the
event of differing rates, including how they may be allocating all payments
to the lower rate before paying off the high one. Make sure you're aware of
how payments are allocated and whether you have the right to request how they
should be allocated.
Read the fine print to make sure you know this before you accept
Over-limit fees, late fees, grace periods:
If the grace period for making payments is stated at 28 days on the initial
offer, then you know when to pay your bill to avoid a late fee.
But the fine print probably will warn you that the company can
change the grace period. Card issuers can change the grace period from 28 days
to 20 days, let's say, and as long as it was in the fine print, it's legal.
Also, David Bach, CEO of Finish Rich Inc. and author of "The
Finish Rich Workbook," reports that some companies have a specific time
on the due date that the bill is actually due. Look for that, too.
"That's a huge trick," says Bach. "If a bill is
due at noon, and someone gets their payment in on the last day in the afternoon,
they're hit with a late fee."
Default purchase rate: By missing
payments, you will start racking up heftier interest rates -- even on other
credit card accounts! It's due to a policy known as a "universal default," and it's buried within the fine print, says Watson. "If you miss
a payment on one account, a totally different creditor may well raise your interest
rate on that card, too. It won't work anymore to keep one card current and hope
for the best on the others. Even a card that has never had a delinquency may
now be charging a higher interest rate."
Transaction fees: Fees for
various transactions, such as using your card for cash advances. Make sure you
consider that and what sorts of transactions you're most likely to make in selecting
Notice of reaffirmed debts: If
you have ever defaulted on a debt, be very careful that your solicitations for
"new" cards don't mention your old debts.
Some credit card issuers buy old debts from other companies and
then offer "new" cards to the people in debt, only to shock the cardholder
on his first statement with the old debt. If a company mentions their right
to do this in writing at any time, then it's legal, and you're responsible.
You're approved up to $25,000!: This
one's not actually in the fine print, it's right there on the front, but people
misunderstand it. The words "up to" are there for a reason.
Someone will apply for a card because they think he'll have $25,000
in credit, only to find a substantially lower limit once he's approved. Credit
card companies will set your limit based on your credit history, and the large
number on the offer is an enticement that probably will not be your ultimate
Double-billing cycle: Robert
D. Manning, a professor of finance at the Rochester Institute of Technology,
reports that some companies employ a double-billing cycle, which means that
while the due date on your statement refers to your minimum payment, the due
date to pay off your entire balance is different.
If that due date is two weeks earlier, and you pay off your entire
card by the due date stated on your bill, then the company could still charge
you interest for the two-week interim period.
The fine print will warn you if the company plans to apply a double-billing
Fee for overdraft protection: Many
credit card companies offer overdraft protection on your checking accounts.
That doesn't come for free. As with anything else, there may be extra fees on
this, possibly nullifying their benefit.
Arbitration: Some card companies
note in the fine print that if there's a dispute, you agree to go to arbitration.
"If you accept a card with arbitration, that's a big red
sign that says, 'Kick me,'" says Manning. "That means that if you
have a complaint with a card company, you have to pay for arbitration."
Balance transfer terms: Lots of
people dispute charges, but if you transfer balances, you may lose that right.
Gift card terms: If you buy
something with a gift card, you may not have the same rights, like purchase
protection, that you would otherwise have on the card.
Leslie Hunt contributed to this story.
-- Updated: Oct. 13, 2005