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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 charged
interest 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 year.
"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."
~ SB, Virginia
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 uncovered.
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 website (https://www.stretcher.com/)
and newsletters. If you'd like to stretch you day or your dollar,
visit today!
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