Credit cards not all the same
When it comes to penalties and fees, not all credit cards discipline their customers for payment missteps or punish them to the same degree for random acts of the market.
The policies of some issuers tend to be more consumer-friendly than others. For instance, some offer more lenient terms and conditions and are less likely to pull the ol’ switcheroo with the payment date that could easily trip up customers.
Good credit cards aren’t necessarily easy to find, especially these days. And they may not be offered by the big guys in the industry. For a little help in separating the wheat from the chaff, consumers can start their search at Web sites such as Cardratings.com, which tracks credit card offers. And don’t forget to compare credit card rates at Bankrate.com.
As always, the best way to avoid traps is to pay your balance in full every month. Short of that, borrowers need to roll up their sleeves and dive into the terms and conditions of each credit card offer to find out if that card is a deal or a dud.
- Rates that go up for no reason.
- Universal default.
- Annual fees.
- Fees, fees and more fees.
- Grace period.
- Default rate.
Rates that go up for no reason
“The biggest complaints we’re getting right now are the cards that raise your interest rates for no reason,” says Gerri Detweiller, a credit adviser for Credit.com. “They really don’t give a reason. Typically, if you talk to them, they will say it is the state of the credit market. They just have to.”
And for now, that is perfectly legal. Many issuers include a clause in the fine print reserving the right to raise interest rates based on market conditions.
“I think if I’m in the market (for a card) and there is any chance at all that I’m going to carry a balance — or even not — I’m going to find out what is the exact policy of this issuer about jacking my rate up. Most issuers have this kind of a catch-all that says that if general market conditions are bad, they can raise your rates,” says Curtis Arnold, founder of Cardratings.com and author of “How You Can Profit From Credit Cards.”
“I can tell you this: You can’t find anyone that would say that general market conditions are favorable right now,” he says.
According to a 2008 survey by Consumer Action, not all issuers change terms based on market conditions. But 17 out of 22 issuers surveyed (77 percent) say they can change terms at any time for any reason.
How to avoid: Shop at local credit unions and smaller banks. Small credit issuers tend to have more consumer-friendly policies, says Detweiler.
Arnold agrees that not all issuers have that catch-all phrase in place.
“They tend to be smaller issuers, like Simmons Bank in Arkansas or credit unions,” he says. “Check your cardholder agreement and any change in terms carefully. If you can’t find anything, call your issuer.”
This paragraph from the terms of the Citi Professional Cash Card illustrates how credit terms can change because of forces within and outside of your control.
Rates, fees, and terms may change: We have the right to change the rates, fees, and terms at any time, for any reason, in accordance with the card member agreement and applicable law. These reasons may be based on information in your credit report, such as your failure to make payments to another creditor when due, amounts owed to other creditors, the number of credit accounts outstanding, or the number of credit inquiries. These reasons may also include competitive or market-related factors. If we make a change for any of these reasons, you will receive advance notice and a right to opt out in accordance with applicable law.
As indicated, if your rate is increased, you may be able to opt out. But there’s a catch.
“You may get a notice that allows you to opt out of the change and pay off the card at the current terms. If you do, you must respond quickly to that notice,” Detweiler says. “And you must close the account.”
Another way for credit card companies to squeeze money from their customers is through the universal default clause. It stipulates that credit card issuers can raise interest rates if your credit score changes, if you take on too much debt or if you pay another creditor late.
Understanding universal default is even more important now, in light of the credit crunch.
“There is a lot of confusion about universal default,” says Curtis Arnold, founder of Cardratings.com and author of “How You Can Profit From Credit Cards.”
“If a credit issuer cuts my credit line and my credit score drops — which is likely — what happens is a domino effect. My other credit card companies start jacking my rates up because of this one action by a credit card company,” he says.
Some companies have publicly stated that they do not engage in the universal default practice, but they may still raise interest rates and fees “due to market conditions” (see “Rates that go up for no reason”).
In the current climate especially, anyone who is considering getting a credit card should find out about the issuer’s universal default policy.
How to avoid: If you have a card with a universal default clause, keep credit card balances low and pay everything on time. If you can manage to not carry a balance, congratulations, you win.
“You want to do everything you can to be as low a credit risk as possible,” says Bill Hardekopf, CEO of Lowcards.com. “Pay your bills on time, and pay as much as you can. Don’t use too much of your credit limit. That debt ratio is a factor in your credit score — if you use too much it can have a negative effect. Your credit limit is not your spending limit. You want to keep your balance to about 30 percent of your credit limit.”
Some credit cards have a pay-to-play rule in the form of an annual fee. The rationale for the fee is that it raises the bar on services offered. For instance, the American Express Centurion card famously offers deluxe concierge services and other perks to the few patrons to whom it’s extended. The annual fee of $2,500 is probably a drop in the bucket for those invited to use it.
But for the rest of humanity with substantially shallower pockets, most run-of-the-mill credit cards will do.
“Eighty percent of cards now do not have an annual fee,” says Bill Hardekopf, CEO of Lowcards.com. “If you are paying that (annual fee), chances are that you will be able to find a card of similar value and appeal that doesn’t have one.”
“Why pay a fee up front just for the privilege of having a credit card?” he says.
How to avoid: Shop around for a credit card that doesn’t charge an annual fee and use the savings to help pay off the bill.
Fees, fees and more fees
Other than the annual fee, most fees — and there are plenty of them — charged by credit issuers are triggered by some type of misstep by the cardholder. Among them are fees for paying late and going over your credit limit.
“The over-limit fee is becoming more and more prevalent as credit card issuers minimize their risk by lowering the credit limit to some of their riskier credit card customers,” says Bill Hardekopf, CEO of Lowcards.com.
“Fees are a very big part of how issuers make their money. Over a third of the revenue they make is from fees,” he adds.
Credit issuers are able to make so much from fees because they can charge so many of them, including cash advance fees and balance transfer fees.
Both of these fees have changed a lot recently.
Just two years ago it was not uncommon at all for anyone who could breathe to be deluged with offers for fee-free balance transfers. At the least they could probably manage to get a transfer with the fee capped at a maximum cost — usually stated as 3 percent of the amount transferred or $75 maximum, $10 minimum fee.
Free balance transfers and fee caps are disappearing, though. For now, finding a transfer offer with a cap on the fee should be considered a victory.
“Fees on these transfer offers have gone through the roof. According to our Web site, they have gone up 300 or 400 percent overnight — that’s the worst-case scenario where they eliminated the cap on that fee,” says Curtis Arnold, founder of Cardratings.com and author of “How You Can Profit From Credit Cards.”
“Now to find one without a fee is very rare. You’re going to pay a fee, but the question is how much? You want it to be capped at $100 or less,” he says.
The same thing is happening with fees charged for cash advances. Never a good deal, they’ve gone from bad to worse by eliminating the cap on the maximum amount that can be charged.
“All of this can be found in the terms and conditions, so you have to be aware that it can happen. There are so many different fees, and they are not well advertised. You have to dig for them,” says Hardekopf.
How to avoid: Read the fine print when considering any credit card offer. Right now you may not be considering a cash advance, a balance transfer, going over your credit limit or paying late. But things happen to everyone. You should know the worst that can happen and make sure you’re OK with it, because it is something you can control by comparing offers.
“It really is critical that a consumer compare credit cards,” says Hardekopf.
“If they are saying, ‘I don’t know which of these three to get,’ they should look at the terms and conditions to compare apples to apples to apples. Because in there they will break out what every fee is,” he says.
The grace period is the number of interest-free days you are allowed between the date of a purchase and the day the bill is due.
Though grace periods used to be a month long — in line with the standard billing cycle — credit card issuers realized they were giving away the store with that policy.
“Cards used to have 30-day grace periods, and then they cut to 25, and now some are even 20,” says Bill Hardekopf, CEO of Lowcards.com.
That means interest can begin accruing on new purchases before you even open your statement.
For people that carry a balance from month to month, the grace period may not be an issue, but for those that pay the balance every month, the best bargain is to pay within the grace period. You get the benefits of buying on credit — convenience plus any rewards or bonuses — and none of the drawbacks, such as finance charges.
“It’s another factor that should be looked at when analyzing what card to get. Sometimes it is important; sometimes it’s not that big a deal,” says Hardekopf.
How to avoid: Not every credit card has a grace period for new purchases, and most don’t offer one on balance transfers and cash advances. Make a note of how many interest-free days a card offers if you plan on paying it off every month.
If you splurge one month and charge a 50-inch TV, paying before the grace period is up could save you a chunk of change.
Most cardholders have the best intentions when they sign up for a credit card. No one plans to pay late or go over their credit limit, so it’s easy to disregard an outrageous default rate or a notoriously unforgiving issuer.
“People have good intentions and don’t anticipate having a problem. But you want to watch out because it can be very expensive if you do trip up,” says Gerri Detweiler, a credit adviser for Credit.com.
Cardholders that accidentally pay late and stumble into default-rate territory get to experience the one-two punch of being socked with a late fee plus enduring a punishing interest rate.
The penalty rate can be found with other major need-to-know information in what is called the Schumer box, named for the New York senator who invented it, in the terms and conditions of the card agreement.
“The Schumer box will tell you what the default rate is on that card,” says Curtis Arnold, founder of Cardratings.com and author of “How You Can Profit From Credit Cards.”
“If you are in default, your rate jacks up to 30 percent overnight. That is good to know because default rates do vary.”
Not always quite so easy to find are the directions on how to avoid getting hit by the default rate.
“What triggers the default rate varies fairly widely,” Arnold says. “These are crucial issues because some issuers — Capital One, for instance — are very liberal. According to their head PR person, you can be late three times in a 12-month period before they engage the default rate,” he says.
“But there are issuers that are real trigger-happy. You’re late once and — bam! — your rate goes up double or triple overnight,” says Arnold.
How to avoid: Obviously, never pay late. Beyond that, shop around for a card that allows more than one mistake or a relatively low default rate. If you carry a balance, credit card companies know it’s not if you’ll mess up but when.
Letters get lost in the mail and emergencies occur. So seek out and do business with credit issuers that treat you less like a wallet with a mailing address and more like a human being.