5 Most Common Credit Card Traps Unmasked
June 25, 2009 by MOYMRyan
Filed under Debt Management
Applying for a credit card should not be taken lightly. Thoroughly researching the interest rates, terms, late fees and reward perks should all be done. Not going through these phases might trap you in debt for a very long time. Already, there about 1.2 billion credit cards in use in the United States. As 43 percent of American families spend more than they earn, 60 percent of the active credit card accounts are not paid off monthly, bringing up the average credit card debt among all American households to $8,400.
You may be an unsuspecting consumer and the unrelenting increase in penalty rates and in the monthly minimum payment are doing you more harm than good. Let us therefore examine the various credit cards traps that are causing tremendous financial stress to most Americans today.
1.) Late payment charges – Late payments can bump your interest rate as high as 27%. Yes, more and more companies are earning more from late fee income than ever before due in part to this sharp hike in late fee (more than doubled between 1992 and 2000). Not only that, credit card companies have also decreased the time between mailing your credit card statement and when payment is due, and about 66 percent of these companies have totally eliminated grace periods or do not have one at all between the payment’s due date and the date a late fee is assessed. In the past year, 13 percent of Americans have averaged being 30 days late paying credit card bills.
2.) Higher over limit charges – A typical credit card purchase ends up costing 112% more than if cash were used. Credit card companies are taking advantage of the American’s tendency towards out of control spending. If you exceeded your limit by as little as $1, many companies will charge you with as high as $40 over-the-limit fee. In 2000, there was only one card that charged a fee of less than $20 to consumers who exceeded their limits whereas 5 years before that, only one bank was found that charged $20 or more to over-the-limit accounts.
3.) Lower minimum payments – Low minimum monthly payments are considered dangerous traps as they encourage consumers to pay higher finance charges over an extended period of time. More and more companies have decreased minimum payments from 5 percent to the current standard of 2 percent or 3 percent to attract low-income consumers.
4.) The many faces of APRs – Beware of the seemingly low Annual Percentage Rates (APRs) that actually increase your debt. Currently, 57 percent of card offers are advertised at low introductory APRs. These APRs run on the average of 4.13 percent and last an average of 6.8 months. A consumer is drawn to this offer because normally a higher APR triggers a more expensive loan as you pay off credit cards in gradual installments. However, credit card companies do not clearly divulge that these short-term introductory APR’s are used to hide actual APRs that are an average of 264 percent higher.
There are other lures such as “Fixed” APR. However, despite the term, these APRs can increase with as little as 15 days notice to cardholders.
5.) Hidden transaction fees – Interest rates from cash advances, convenience checks and balance transfers are usually higher than interest rates for normal credit card purchases. Even pay-by-phone and charging on foreign countries have corresponding higher fee charges. It may be stated in the credit card notice that collecting minimum fees may guarantee the credit card companies higher fee income regardless of the transaction amount but cardholders easily miss them in lengthy terms and conditions. Lost in the lengthy fine print as well is the stipulation that if the applicant is not qualified for a premium card, the credit card company can substitute a lower-grade, non-premium card which in fact is more expensive and has less flexible terms.
It is a great thing that President Obama has recently signed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009. Among the many stipulations accommodated by this law are the prohibitions of
1) retroactive rate increases
2) card charges for pay-by-phone payments unless it is 60 days overdue
3) double-cycle billing or the imposition of card charges for previous and current balances.
Despite these new rules, cardholders must continue to be cautious about their credit card habits. This is because just as banks will start controlling their abusive practices, other methods of collecting hidden charges from cardholders will surely spring up that can hurt consumers just as before. Therefore, it would hurt less if these consumers will be even more vigilant and prudent in the use of their credit cards in the future.
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