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Avoiding Credit Card Traps

by Gary Foreman

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

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.

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 Certified Financial Planner.

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