Understanding how your credit card company assesses finance charges and penalties can save you hundreds of dollars. Bankrate expert Dr. Don Taylor answers some of the more frequently asked questions on these charges.
1. My credit card interest rate was jacked up to 29.99 percent when I was late paying the bill. What is the maximum allowable APR on credit cards?
It's a popular misconception that state usury laws protect borrowers from high interest rates on their credit card debt.
Credit card issuers scored a sweeping victory in 1978 when the Supreme Court ruled in Marquette vs. First Omaha Services that it was legal for nationally-chartered banks to export the more costly terms of their cards to states where the laws regarding interest rates restricted such practices. The credit card issuer need only follow the law of the state in which its credit card operations are located, not the laws of the cardholder's state of residency.
After this Supreme Court ruling, credit card issuers migrated to states with permissive credit policies like South Dakota and Delaware.
That's why it's so important to make timely payments, even if it is just the required minimum payment. Besides avoiding late charges, you keep your payment history intact and avoid giving your credit card company an excuse to raise your interest rate.
By the way, many credit card agreements are now written so the company can raise your rate if you are late on any of your bills, not just their credit card.
Get a copy of your credit report and your credit score and see for yourself how bad things really are. You can order your credit report online and get the results in minutes. Correct any mistakes on your report, and start the rebuilding process. Although late payments stay on your credit report for seven years, the negative effect of these items lessens with time as you rebuild your credit history.
You need to get out from under this 30-percent albatross. After reviewing your credit report for mistakes and making any needed corrections, you're ready to look for replacement credit.
First, talk with your current lender and ask them to reduce your rate. Make it clear that you plan to vote with your feet and find a new lender if they aren't willing to reduce your rate. It's not likely to work, but it's worth asking. If they say no, then it's time to do some shopping.
If you belong to a credit union, or are eligible to join a credit union, talk to them about transferring this balance to their credit card. Or look at taking out a personal loan for the amount needed to pay off the card.
If you have equity in your home, consider taking out a home equity loan. Just don't apply for debt all over town. Multiple credit applications make you look desperate, and lenders don't like to lend to desperate people.
If none of this works, make every effort to pay down as much as you can each month on this card until you pay it off.
2. I usually pay on time, but occasionally I miss the due date by a day or two. Are these exorbitant $35 late fees fair practice?
I'm going to start out on the bank's side on this one. A credit card is a line of credit. The bank commits to loaning you money up to your credit line, and you commit to paying them back. When you don't pay your bill on time, the bank starts to wonder if you're going to pay it at all. By penalizing cardholders for late payment, the bank both trains you to make timely payments and gets periodic affirmation of your commitment to repay them. OK, so nobody likes negative reinforcement, and $35 is a pretty expensive reminder. Especially when a couple of late payments are then used as an excuse to raise the interest rate on your credit card.
What to do? First, call the credit card company. Tell them that you plan to move the account if they don't rescind the late fee. That should work the first time, and it won't the second time. Then ask yourself why you're late with these bills. You may need to organize the due dates to fit your monthly budget flow.
Here's more tips on avoiding late payment fees.
3. Can a credit card company continue to charge over-the-limit fees on an outstanding balance of a closed account?
First off, you can't close an account that has an outstanding balance. You can, however, notify the credit card company that you want the account closed to new purchases. Interest charges and fees aren't purchases and can continue to increase the outstanding balance.
Credit card companies have the ability to not authorize purchases that would put your account over its credit limit. So anything that is above your credit limit was either done with their authorization or by interest and fees taking the balance over your limit. Regardless of how the fees got there, they aren't illegal.
The credit card company isn't likely to help you with your problem. You've closed the account to new purchases, so they know they don't have you as a long-term customer. Now, they're just making what money they can off the account before you pay it off or it goes into default.
You can't afford to not pay down this debt. I'd hate to see you go in to credit counseling for this one debt because of the negative effect it has on your credit report, but you need to find some way to make this stop. I'm going to suggest that you apply for a new credit card and, if successful, transfer the balances away from your current credit card.
First check your credit report. Dispute any erroneous items. Then search for a new credit card on Bankrate. Only apply for one card. All credit applications will show up on your credit report, and multiple applications and denials will hurt your ability to get credit in the future.
You're actually more concerned about the new card's credit line than the interest rate because you need a line big enough to be able to transfer the balance and close the old account, so don't chase a low introductory rate that you won't qualify for. Just being able to put the $35 a month you were paying in fees toward paying down the balance will help out a lot.
If you can't qualify for a new card, then credit counseling may be your best solution. A credit counselor can negotiate a repayment plan with your creditors and may be able to reduce the interest rate on your debt. They will definitely be able to stop the over-the-limit fees.
Most agencies are nonprofit, but that doesn't mean that they won't charge you a fee to put together a budget and repayment plan.
The National Foundation for Credit Counseling can help you find a credit counselor in your area or even counsel you online. The FTC has a list of questions to ask when meeting with a credit counselor. If you choose to go this route, you should interview two or three credit counseling agencies before signing with one.
4. A company has offered to help me get a low-rate card for a high fee. Is this my only option for a low-rate card?
No, you don't have to pay to get a low-interest credit card. You don't need a middleman to get your foot in the door with a national bank. (Paige Kroger's story on credit card wise guys underscores this point of view.)
Your credit history is what it is. You can correct errors in your credit report and rebuild your credit over time, but paying someone a high fee for the privilege of having them find you a credit card is wasted money. Put that money toward your credit card bills.
People who are choking on their credit card interest rates should review their credit reports, and correct any errors in the report by using the dispute process established under the Fair Credit Reporting Act. Do that first, so you know that you're putting your best foot forward when applying for a new credit card.
Then you can go shopping for a new card using Bankrate's credit card search feature. Only apply for one card, and see what happens. Multiple credit card applications make you look desperate, and firms hate to lend to desperate people.
Meanwhile, keep paying down those balances, and use the Bankrate calculator to help you find your next credit card.
5. I did a balance transfer from one credit card to another. My new credit card company sent me a check to pay off my old account but started charging me interest immediately. Is it fair to pay interest on money I've not received yet?
Balance transfers are typically treated as cash advances, and interest will accrue from the day the check was issued. There's nothing improper about the credit card company charging you interest from the time they cut the check.
If there was a several-day delay between the time you made the request and the date they cut the check, and they charged you interest from the day you made the request, then you have a reason to be upset, and you should talk to a customer service manager.
If that doesn't get results, you could file a complaint with the Federal Reserve Board or the Office of the Comptroller of the Currency if the credit card company is a national bank.
Credit card companies aren't above earning interest on the float from the delay between when the check was cut and when the check clears. It's their float to invest.
I don't understand why they weren't able to wire the funds to your bank or send the check via overnight delivery, but the cost to you for those services would likely outstrip what you paid in interest on the money.
Make sure you're not making a mountain out of a molehill. If you are transferring a balance of $10,000 at 5 percent, a week's worth of interest is about $10. Think about the money you'll be saving in interest expense during the introductory period, and how you're going to use that interest rate break as an opportunity to pay down your outstanding balances.
Worry more about making the payments on time to avoid late charges and providing an excuse for the credit card company to end the introductory period and raise your interest rate.
6. I'm looking for a credit card that I plan to use on special occasions and pay off the balance monthly. What card is the best choice for avoiding hidden fees and clauses?
If you're planning to pay off the balance every month, you should be less concerned about the interest rate and more concerned about the grace period before they start charging you interest on your purchases.
Credit card agreements aren't written in stone. Variable rates fluctuate with changes in the Fed Funds rate, but so can rates on a fixed-rate card. The card companies will change terms as needed to remain competitive with other credit card issuers. If you don't like how a credit card issuer has changed the terms on your card, vote with your feet and find a new card to carry. You can shop for a new card on this site. Good luck!
7. How does two-cycle credit card billing affect the cost of credit?
With two-cycle billing, the average daily balance used to calculate interest charges is calculated from two billing cycles rather than one. This approach to calculating interest effectively wipes out the grace period for customers who carry a balance. Two-cycle billing is expensive for people who only sometimes carry balances.
You'll be paying interest on the average of the two cycles. Let's say you transfer $5,000 to the two-cycle card and plan to pay down your outstanding balance by $500 a month. Your average balance for the first cycle is $5,000 and you owe $15.95 in interest, so you pay $515.95 and have a $4,500 outstanding balance.
At the end of the second billing cycle, the credit card issuer calculates interest due based on the average balance for the two periods, or $4,750, and your interest payment is $15.15. You've paid $31.10 in interest.
With a one-cycle card at 4.9 percent APR, you pay $19.95 in interest the first month and $17.96 in the second month, for a total of $37.91. The two-cycle card has saved you $6.81 over the two periods.