Credit card companies now charge interest rates as high as 40% a year. There's no legal limit on the amount
they can charge -- and, it seems, no limit to the tricky terms and conditions hidden in the fine print that card
companies impose on unwary consumers. What you need to know...
THE UNIVERSAL DEFAULT TRAP
Many credit card companies are just waiting for you to miss a payment. Why? So they can jack up your
interest rate. They've developed the concept of "universal default" to make this easier for themselves.
A universal default clause in your credit card agreement lets the company raise your interest rate even if
you're late with a payment to some other creditor. If you miss a car payment, for instance, or you're late on
some other credit card, your interest rate can shoot up.
Surprise: This can happen even though you've signed up for a zero-interest offer and have always paid that
bill on time.
Universal default clauses are becoming standard in credit card agreements -- 45% of card issuers now have
them, and most of these enforce them.
Self-defense 1: Read the fine print of your credit card agreement to see if you are subject to a universal
default clause.
Sample universal default clause: "If cardholder is reported as delinquent on an account with any other
creditor, we may increase the APR [annual percentage rate] on your account up to the maximum default APR."
Action: Shop around to find a card without this feature. Consumer Reports has listed 10 consumer-friendly
credit cards that don't employ universal default policies (or clauses) and don't charge balance transfer fees.
See the list and access the complete report at www.consumerreports.org/cro/personal-finance/
10-most-consumerfriendly-credit-cards-1105/index.htm.
Self-defense 2: If you're stuck with universal default, never pay your bills late. Get into the habit of paying bills
well ahead of the payment due date.
Self-defense 3: Keep a late credit card payment off your credit record. Ask the card issuer to ignore the late
payment because you've been a good customer. Many companies will do this.
Self-defense 4: Be sure to read any changes to your credit cards' terms and conditions -- an issuer can add a
universal default clause at any time.
NO-LATE-FEE CREDIT CARDS
Shrinking grace periods (the time in which a payment is not considered late, which had historically been one
month but today averages just 23 days) are making it easier for card companies to hit consumers with late
fees. Sensing an opportunity, companies have developed no-late-fee credit cards. These cards often carry no
annual fees and can save you as much as $39 for each late payment.
Trap: When you repeatedly miss the payment deadlines with some of these cards, your 0% introductory
interest rate can skyrocket to 30% or more.
Other traps: Some companies eliminate the no-late-fee benefit during any billing period in which the
customer doesn't use the card. And even with a no-late-fee card, if your payment arrives more than 30 days
late, the card company will report your transgression to a credit-reporting agency, such as Equifax, which
could cause other lenders to raise rates on your outstanding debts.
Self-defense: Steer clear of no-late-fee credit cards.
BALANCE-TRANSFER TRAPS
Consumer-friendly caps on balance transfer fees are vanishing. Although most still have no balance-transfer
fees, a quarter of credit card companies charge an average of 2.5%.
Balance transfers are considered cash advances. After a promotional transfer rate expires, usually after six
months, the APR is often considerably higher on the remaining transferred balance than the APR for
purchases -- sometimes by as much as nine percentage points.
Another trap: When you make a payment on a card to which you've transferred a balance, the payment is first
credited to your purchase balance, not the balance-transfer balance. You have to pay off your purchase
balance before you can even start making a dent in the transferred balance.
Self-defense: Read the fine print on any balance-transfer offers. Reject any offers that you don't understand or
that appear to have onerous terms like the ones above.
MINIMUM MONTHLY PAYMENTS
Federal regulators have ordered a substantial increase in minimum monthly payments to help consumers
avoid long-term, high-interest debt. Some consumers may even see their minimum payment double -- going
from 2% to 4%.
Trap: This change will help some borrowers pay off their debt more quickly and reduce interest costs over
time -- but, for example, it will still take almost 12 years to pay off a $5,000 balance at a 16% APR (the current
average) by making just a 4% minimum payment -- and total interest would be about $2,400!
Solution: Never make just the minimum payment. If you can't pay the full balance, always pay as much as you
can afford.
If the new 4% minimum payment is a hardship, ask your bank to restructure or defer payments, lower your
interest rate or waive fees. Some will. If yours will not, complain to its regulator. For more information go to
www.truthaboutcredit.org. The big card issuer MBNA has a guide to monthly minimum payment changes on
its Web site (www.mbna.com/services/minpaychange.html).
UNEXPECTED APR INCREASES
So-called "fixed" APR rates can be raised at any time, with as little as 15 days' notice, even if a borrower has a
perfect record of paying on time.
Example: One card's APR of 8.5% jumped to 17.4% when the card was sold to a new bank.
Self-defense: Check your credit card statement each month to verify your APR. Call your bank to see if it will
lower your APR -- this will depend on your credit record and payment history. Find another credit card if your
new APR is unsatisfactory.
REWARD CARDS
Reward cards offer cash rebates or points redeemable for merchandise, travel, etc., for every dollar the
consumer spends using the credit card. Some credit cards will give you a discount on a purchase made from
the card issuer -- for example, GM credit cards will give you a discount on the purchase of a new GM vehicle.
Pitfall: If you carry a balance with these cards, the APR is typically higher than that of a non-reward card, and
the value of rebates, merchandise and discounts may add up to considerably less than your additional
interest payments.
Self-defense: Use these cards only if you make frequent, large purchases with them and always pay off your
monthly bill in full.
