Credit cards are serious financial tools that are often demonized but are neither inherently good nor bad. Handled responsibly they offer conveniences and benefits; in the wrong hands they can result in overwhelming debt and poor credit scores. Making poor choices and several traps within many credit card agreements only make a bad situation worse. Establishing better money management skills and avoiding certain credit card terms are the keys to improving how well credit cards work for you.
Deferred Interest Solicitations
Retail credit card promotions are notorious for offering deferred interest while making it sound like a benevolent service. At first glance, 0% interest for 12 months seems generous and helpful, but look deeper and you’ll see the hook. If you don’t pay the entire balance by the end of the introductory period, you’ll be charged the interest that would have accumulated from the opening of the account, which can be a substantial amount with APRs often in the 20 percent range.
Zero APR Limitations
Zero percent APR credit cards are the easiest way to save money when using credit. The downside is that there are often limits to the agreement that can catch you off guard.
• No guarantee of 0% approval.
• Introductory rate time frame is less than advertised. Don’t accept less than six months.
• The 0% rate may only apply to purchase OR transfers and NOT both.
• Pay late and lose the 0% rate.
Default Penalty APR
This penalty imposes a huge jump in the APR on an account for minor transgressions. Make two late payments in a six month period or default on any other account with the bank and you could be paying up to 35% APR on the balance. Your account will stay in the penalty zone interest rate for as long as the bank chooses to keep you there.
Interest Rate Calculations
The disclosure statement for every credit card provides a variety of interest rates for different types of transactions. This is where you will find how interest rates will be calculated. Different rates may apply for transferring a balance, taking out a cash advance and penalty rates for delinquency or late payments. Credit card providers can change rates at their discretion – interest, fees and other terms for any reason. This is why every piece of communication you receive from your credit card company needs to be read and not just assumed to be junk mail.
There are fees that may come as a surprise in the terms of some credit card agreements. One that has cropped up recently is a non-usage fee that is imposed if you do not use the card within a specified period of time. Another is a monthly fee for sending you a paper statement, a way to encourage e-billing.
The worst offenders by far are banks that provide secured credit cards. These are accounts typically used by people trying to build or repair their credit history. Charges may include an application fee, an annual fee, a monthly fee, a payment processing fee and a charge for calling their customer service number.
Foreign Transaction Rates
While less common, there continue to be cards that charge a fee of up to 3% for transactions outside the United States. This may include cash withdrawals as well as all purchases. If you travel extensively, the amount you’ll pay in foreign transaction fees can be substantial. Look for a card that doesn’t charge the fee; there are plenty to choose from.
Also, keep in mind that a lender may substitute another credit card with different terms and rates, if they determine that you don’t qualify for the one you originally applied for.
Good and Bad News on Rewards
First, never choose or use a credit card based on a rewards program. If it fits into your lifestyle and makes sense to use one, than it is most assuredly a wise move. Obviously, if you have the discipline to make rewards work for you and the ability to pay the balance off each month, a reward credit card is a benefit that you shouldn’t pass up.
Spending to earn rewards is a losing proposition that leads to bigger debt. If you’re paying on a balance over a long period of time, any reward will be negated by the interest you’re charged in the first few months. In addition, some programs are so convoluted as to make them useless for most consumers. One example is programs that offer bonus rewards for specific purchases at different points in the year - confusing and too time consuming for many people.
One last trap to avoid has to do with how you manage your credit card accounts. Drawing out paying off credit card debt by paying only the minimum required will mean the debt will hang over your head for years as it increases the lender’s profits. There are few things more discouraging than paying month after month and seeing little progress in getting out from under the debt. Pay as much as you can each month and keep more of your hard earned money in the long run.
Vanessa May is a regular contributor to Wow’s Smart Credit Card Blog along with other financial sites throughout the web. Her goal is to educate consumers with the assistance of government and other reputable sources to provide relevant news and helpful information on money management, debt services, credit card comparisons and a wide range of finance related topics.