Avoiding Credit Card Traps
The Dollar Stretcher
by Gary Foreman
Question: We were offered a one-year 2.99% interest
rate on an existing Visa account that we didn't use very much.
We wanted to use the card to make a very large purchase with the
intent of paying it off within one year.
Luckily we checked the "fine print". The original purchase will
be at 2.99%. But any subsequent purchases on that card will be
at 15.99%. There's a huge red flag - the original "loan" must be
paid off before any payments will be credited to the new
purchases that are made. So what we pay every month goes toward
the 2.99% charge and, for example, the airline tickets I later
purchased with this card will continue to accrue 15.99% interest
charges until I pay off the original purchase sometime next
I said we're lucky because we understand the rules and have put
the card away until it's paid off. I shudder to think how many
people don't catch this little quirk.
Answer: SB is right. Many people are being tripped
up by the fine print in credit card agreements. She's fortunate
to have caught on before charging up a bunch of stuff at a
pretty stiff interest rate.
Credit cards have come a long way. A generation ago there was a
'one size fits all' approach. Today, you can choose cards based
on their fee structure, interest rates, cash advance provisions
or even the rebate
offered. But, with all those choices comes the responsibility to
know what the credit agreement says.
The agreement will specify what the card issuer can do with the
account. The language isn't always easy to understand. If you
have trouble figuring out what something means, call the card
issuer and ask for an explanation.
Don't use the card until your question is answered.
All that fine print is actually a blessing in disguise. It will
tell you how the card issuer intends to take your money. All you
have to do is to read and understand the credit agreement.
There's no reason to get caught.
Most of the traps can be avoided if you know where they are.
Be careful of zero or low rate offers. Low initial rates
typically are only for a limited amount and a short time period.
The agreement will explain which purchases or balance transfers
are eligible for the low rate. It will also say what you'll be
charged for other non-eligible purchases. That's the trap SB
You might also find that cash advances and balance transfers
carry a different, higher interest rate than other purchases.
You would expect that variable rate accounts would have changing
interest rates. But, even so-called 'fixed' rates can be
changed. They're only fixed for 15 days.
When you get the card in the mail don't assume that you're
approved 'up to $5,000' as advertised and that your credit limit
is $5,000. Depending on your credit score, you could be approved
for something considerably lower.
Understand what happens when your account goes 'over limit'.
Don't assume that they'll automatically refuse to accept a
purchase that puts you over limit. Most will actually let you go
over limit, but then penalize you with
fees and higher interest rates!
Another trick is to send you a card that's different than the
one that you applied for. You could be turned down for the card
with the low-rate balance transfer but issued one without that
special feature. If you use
the card you will be accepting the terms on the agreement that
came with it. Even if they're different from the one that you
first applied for.
You'll find other little tricks in the fine print. For instance,
it's common for the 'grace period' to expire early in the
morning. You can be
pretty sure that the mail delivery will be later in the day. So
your payment needs to be there a day early.
Look for something called 'universal default'. It means that if
you're late on another payment, the interest rate on this
account will be increased.
Finally, the lender will have a provision in the agreement that
allows them to change the agreement. All they have to do is to
notify you of the change in writing. That means that you need to
read everything that comes from the
issuer. Some have been known to send out amendments that look
like junk mail. If it comes from your card issuer you need to
open and read it.
SB has learned that you can use credit card rules to your
advantage, but if you don't know the rules your almost certain
to lose the game.
Gary Foreman is a former financial planner who currently edits
The Dollar Stretcher
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