Credit Card Traps

Money/Finances - Budgeting Money

By: w1127 14-Oct-2010

Higher Than It Appears Balance Transfer Fees

For example, a credit card company offers you "zero percent interest" for nearly a year, if you just transfer a balance to their card. "Think of the money-saving possibilities!" the advertisement proclaims. Or, maybe read the fine print to see how elusive the savings really are.

The fine print: Your transferred balance will be subject to a "balance transfer transaction fee" of 5% or $10 (whichever is greater). Does that mean you're paying a 5% APR on that first year balance? Nope. Because this credit card balance will decrease over time - and you're paying that 5% fee on the highest balance you'll have on the "zero-percent" deal - your APR is going to be considerably higher than 5%.

Costly Business Cards

Remember, the Credit Card Act's protections do not extend to business cards, all the dirty tricks credit card companies were able to pull off before reform are completely legal with business cards, such as -

You remember that "zero-percent" deal for six months on transferred balances? If you use this card, you might as well kiss that relatively cheap financing goodbye. Unlike consumer cards, where you now can apply payments to the highest-cost balance first, the business card can "allocate your payments and credits in a way that is most favorable and convenient for us." This means that the credit card company will force you to pay off the "promotional" balance before they'll apply payments to balances that are accumulating interest at a higher cost. Minimum rate could be 20% even the prime rate is only 3.25%.

Costly Foreign Transaction Fees

Almost all card companies have also imposed foreign transaction fees that apply whenever you use your card overseas or even by from a merchant that's headquartered outside of the U.S. The cost: 3% of the transaction. The only card company that doesn't currently impose these fees is Capital One.

Annual Fees

The Southwest Airlines card, that offers me a free flight with the first swipe, is benign by comparison. Its main catch is a $59 annual fee. Although, if you transferred a balance to this card, you'd pay a 5% transfer fee too. Are the fees worth the potential rewards? Probably not. Why? The fees are a sure thing, the rewards aren't, as is better explained below.

Reward Limits & Rescissions

If you have rewards cards in your wallet you might have noticed that the formula for accumulating rewards has changed. The new trend is to scale back programs that offer rewards on everything and replace them with "bonus" reward offers that give you up to 5% on designated categories of spending.

There are three catches with these bonus offers. First you've got to register every three months to get the bonuses. If you forget, no bonus. Secondly, most issuers put limits on the amount you can earn at the "bonus" rate. Discover's More card, for example, restricts your bonus to $15 a quarter, or $60 per year. Chase Freedom restricts you to $75 per quarter or $350 per year. Citi Platinum Select offers a maximum rebate of $300 annually.

But the biggest catch of all is that your rewards can be taken away. If you cancel the card (without collecting first); pay late, or otherwise run afoul of your card company - or if the company simply changes its mind - the rewards can be ripped away.

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Comments

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jseven 2/20/2012
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I got rid of all credit cards and don't regret it. Congrats on a good list!
ElaineChastain 2/20/2012
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I know some people who should read this. They just don't take the time to understand their cards of choice and how much damage they can do.
goodselfme 2/19/2012
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Congratulations on the front page spot! You have done a great job on this list.
clewand550 2/19/2012
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Great tips. Congrats on front page.
pamperedpen 2/19/2012
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Thanks for the credit card tips. H5
tracyann 4/17/2011
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Excellent list.
JulieMcMurchie 10/23/2010
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Good reminders about credit card traps.