Dirty Dozen Article

8/14/2019 Dirty Dozen Article

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The Dirty Dozen Credit Card TrapsBy Sharon DempseyFor CareOneCredit - May 18, 2007

Does the credit card industry profit mostly from interest rates? Yes. But wait, theres more. Credit cards are themost lucrative segment of banking, and not just because of the interest charges. Its a case of the good, thebad, and the ugly: The low interest rates (the bait), the high interest rates (after youre hooked), and the fees(the sinkers). Everyone in the industry wants to sell you a credit card. Dont be fooled by the offers. Below wepresent a dirty dozen traps and tricks used by credit card peddlers to fill their pockets and empty yours.

1. The 0% APR. Not forever, and maybe not everAlmost everyone gets credit card offers in the mail. 0% APR it says in big letters on the envelope and at thetop of the offer. Its a loss leader, but the only one who loses is you.

Most of the 0% Annual Percentage Rate (APR) offers are for balance transfers only, meaning that you cantransfer the balance you owe on another credit card to the new card. Any new purchases or cash advances willhave a much higher interest charge. Even if the 0% introductory offer includes purchases, the special rateexpires quickly, usually after a few months.

But the real catch is that you might receive the discounted APR for an even shorter time than advertised, or notat all. Below is a screenshot of the terms for the HSBC American DreamCard MasterCard. The introductory APRis 0% for purchases. The time period is 5 months.

[INSERT] HSBAmDream-1.gif

First of all, you will only get the 0% if the card issuer decides to give it to you, which you wont know until afteryou have applied. If your credit rating is favorable to them, you might (or might not) get the 0% APR, but evenif you do, watch out for the sand traps. Below is the small print for the American DreamCard. Note that if yourmonthly payment is late one time (once is enough), the 0% APR jumps to 17.99% (or 12.99%, whichever theyfeel like charging you do you feel lucky?). If you have two late payments, the APR hits the ceiling andbecomes the penalty or default APR.

[INSERT] HSBAmDream-2.gif


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2. Default APRCredit card disclosure statements have something that is innocuously labeled the default APR. Once upon atime the default APR was for subprime, bad credit boys and girls. But not anymore. Credit card providers areanxious to increase their take, and impose the default APR for minor transgressions. Below is the disclosurestatement for Merrick Banks Hooters MasterCard. To date, the highest APR for any credit card is 35%.

[INSERT] Merrick-Hooters-Highest-Def.gif

Note that if your payment is received late twice in six consecutive months, you will be bumped up to the defaultAPR, whose maximum is 35%. If you default in the performance of any of your obligations in connection withany other account or fail to honor any other obligation you have [with Merrick Bank], you will pay the default


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APR. What could that mean? Pretty much anything the bank wants it to. And one more thing: You will stay inthe penalty zone default APR for as long as the bank chooses to keep you there.

3. Fixing what aint broke Fixed vs. variable APRsWhen you see the term fixed APR on a credit card offer, you might assume that, like a traditional homemortgage, the interest rate will remain unchanged for the life of the loan. But that is not true. A fixed APR on acredit card simply means that the creditor is legally obliged to notify you if it changes the APR (unless, ofcourse, you are being penalized for violating the terms of the credit agreement like paying late once). If thecreditor changes the APR for reasons of its own, federal law says you must be given 15 days notice.

Variable APRs are interest rates that rise and fall according to the changes in a national index, usually the WallStreet Journals survey of prime lending rates among U.S. banks.

Below are the terms for the credit cards available from Workers Credit Union. Two cards have fixed APRs andone has a variable rate. Note that the Platinum Visas variable APR is reviewed and changed quarterly accordingto the Wall Street Journal prime rate.

[INSERT] Workers-CU-FixedRate-1.gif


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Whether your credit card has a fixed or variable rate, the credit card provider can change the rate at itsdiscretion. The terms for a First National Bank of Omaha Visa card states the facts clearly: We reserve the rightto unilaterally change the rates, fees, costs, and other terms at any time for any reason

[INSERT] FirstNational-Visa-ChangeRe.gif

Therefore, be warned. Just because you have shopped around for a low APR, and have received a credit cardwith that APR, doesnt mean you will still have the same low interest rate three months from now, or even onemonth from now.

4. Truth or consequences Will the real APR please stand up?Below is the disclosure for the Fifth Third Bank Platinum Prime MasterCard. It is an excellent example of thecredit industry shell game.

The APR box at the top presents a menu of eight possible rates that your card might have, depending on thelenders review of your application and credit history. Under that is the balance transfer APR, the cashadvance APR, and the delinquency APR.

On the next level down in the maze is the disclosure that APR rates are adjusted monthly. Not yearly, not everysix months, not every quarter every month.

Below that you find that there is an $85 annual fee if you apply for the prime rate + 0% APR; however, cardswith the higher APRs do not have an annual fee.

Last but not least, you are informed that if your application for a Platinum Prime card is rejected, the lendermay substitute another MasterCard with different rates and fees.

[INSERT] fifth-third-confusing-rates.gif


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The general trend in credit card offers is to show multiple rates in such a way as to confuse the applicant andmake comparison shopping among credit cards difficult.

5. The Late Fee Going from carriage to pumpkin at midnight (or 5 p.m.)


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As if doubling your APR was not enough punishment for a late payment on your credit card balance, banks havealso sharply increased late fees and other penalty fees. Currently the highest fixed late payment fee for creditcards is $39. Below is a screenshot that shows the late fee and over-the-limit fee for a Bank of America creditcard. Note that the bank has the option of increasing your APR to the default if you are late (once) or over thelimit (once).

[INSERT] BofA-LateFee-1.gif

Another interesting development is the imposing of a late fee based on a percentage of your balance. Below isthe late fee disclosure for an American Express Platinum card. If you were carrying a balance of $5,000, yourlate fee would be $149.50.

[INSERT] AmEx-Platinum-LatePercentag.gif

What you wont find in the disclosure statements is this: Just because your payment is delivered by the duedate does not mean it will be credited to your account on that date. The creditor will post the payment when itgets around to it, and some consumers have complained (on Internet blogs) that their payments were sent andreceived early, but the card issuer delayed posting for purposes of charging late fees.

Moral to the story: if you can send your payment even before you receive the credit card bill, do so. It mightget there in time to be on time.

6. Cash will cost you more Cash advance fees and APRsNeed cash? No problem. You can obtain a cash advance on your credit card. Just remember that you will pay atthe front and out the back. Frequently cash advance fees are 3 to 4% of the transaction amount. Aftersearching the Internet, it seems that 5% is the highest fee currently charged for a credit card cash withdrawal.Below is a screenshot of the Orchard Bank / HSBC MasterCard 5% cash advance fee.

[INSERT] Orchard-HSBC-Cash-Advance-1.gif


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Lest you think you have paid your dues when you take the money and run, we remind you that besides theinitial fee, you will also pay a higher interest rate for your legal tender. The terms below are for a CitiMasterCard. Note that the 23.24% cash advance APR is 7% higher than the purchase APR.

[INSERT] Citi-CashAdv-APR-1.gif

One more thing: Because the creditor wants to profit as much as possible from the loan, it will always applyyour payments to the lower APR balances first (i.e., purchases and balance transfers will be paid off before cashadvances), as noted in the illustration above.

7. Pay to play -- Membership is expensiveHigh income and low income credit card holders are equal in one way: When it comes to joining the club, itcosts you more. The annual fees for premium and subprime credit cards are high. Also, credit cards for peoplewith bad credit ratings have additional setup fees.

The most expensive credit card annual fee belongs to the American Express Centurion Black card, whose

members belong to a (not so) secret, by-invitation-only group of high rollers who charge on the Black upwardsof six figures a year. The annual fee for the AmEx Centurion Black is $2,500.

Other American Express cards, for the rest of us, cost a premium to carry. Below is a screenshot for anAmerican Express platinum card, with an annual fee of $450.

[INSERT] AmEx-Platinum-AnnualFee-1.gif


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The screenshot below is an example of annual fees for those residing at the other end of the income scale. ThePlains Commerce Bank Total Visa card is for people with damaged credit ratings. Fees to open the credit cardtotal $152, and the annual fees are $144.

[INSERT] Plains-Commerce-Bnk-TotalVisa.gif

For those in between the two extremes, there are cards that offer some kind of reward for frequent usage, suchas airline miles or discounts at restaurants, hotels, or stores. These cards frequently have annual fees in the$50 to $150 range. Whether the annual reward is worth the annual fee should be something that you considercarefully.

8. Playing with your emotions Charity affinity cardsWe want to do something good for the world cure cancer, save helpless animals from suffering and extinction,

build houses for the needy Enter the charity affinity card. Credit card providers make an agreement with acharity to use the charitys name on the card, in exchange for a donation to the charity. The question is, howmuch is being donated to the charity? For some reason, the providers do not disclose the amount.

The screenshot below is a chat session with Bank of America customer service about its American DiabetesAssociation American Express card. The provider does not say how much is donated to the American DiabetesAssociation. In fact, it will not disclose the donations for any of its charity affinity cards.

[INSERT] charitycard-chat.gif


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If you search long and hard, you may find a credit card disclosure that specifies the amount of donation. Thescreenshot below indicates that when you make a purchase using the Make-A-Wish Visa card, 0.65% of thepurchase amount will go to the Make-A-Wish Foundation.[INSERT] MakeAWish-1.gif

If, for example, you make $12,000 of purchases during the year on the Make-A-Wish Visa card, then $80 will goto the charity. How soon the foundation gets its money is not mentioned; we would hope it receives the sumannually.

Are charity cards a trap? They are a deception. They are a feel-good marketing technique used by creditors tolure more customers into their net. As long as you know that, and keep in mind that the charity will receive avery small amount of money from you, while once again maximizing the profits of the creditor, then charitycards are not a trap. You might consider this: If you can afford to make $12,000 of purchases in a year, youmight be able to afford sending your favorite charity an $80 check directly, and cut out the fat and prosperousmiddle man (the credit card provider).

9. The one-two punch Two-cycle balance computation

Most credit card providers calculate their finance charges according to the average of your daily balance duringone month (adding new purchases and subtracting payments). But a number of card providers are using a two-cycle balance computation. This calculation method determines the interest fee from an average of two months.Your finance charges will be much higher than charges based on the average daily balance calculation if you donot pay off your credit card in full every month.

The screenshots below show a Discover card and a Washington Mutual MasterCard using the two-cycle balancemethod of finance charge calculation.

[INSERT] Discover-2-cycle.gif


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[INSERT] WashMutual-2-cycle-1.gif

10. Pay not to play Inactivity feesSome credit card providers will charge you if you do not use your card. Below are the fees associated with aWorkers Credit Union Visa card, including a non-usage fee.


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[INSERT] Workers-Nonusage.gif

11. Other peoples money Foreign transaction feesIf you purchase something outside the United States, or get a foreign currency cash withdrawal from your creditcard, the credit card provider charges a transaction fee. This fee is over and above the 1% currency exchangefee that Visa and MasterCard charge you. Banks have invented this fee and added it to the long list of extracharges simply because they can. There is no additional processing work done by the bank. The foreigntransaction fee ranges from 1 to 3%, with a few exceptions. Capital One does not apply foreign transactionfees.

Below is the Wells Fargo disclosure for one of its Visa cards, which states the foreign transaction fee is 3% ofthe purchase amount.

[INSERT] WellsFargo-Foreignfee-1.gif


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12. Forever is a very long time Paying the minimumThe last trap of the dirty dozen is not obvious and you probably wont see it on a credit card disclosurestatement. Very small payments on a loan mean you will spend a very long time paying back the loan. Morethan that, you will ultimately pay several times the amount you spent on purchases or cash advances becauseof the accumulated interest charges.

Most credit cards require a minimum payment of 2% of the balance, assuming you are not condemned to thedefault APR corner. The illustration below shows the minimum payment for a Phillips 66 MasterCard issued byCitibank.

[INSERT] Phillips-2percentmin-1.gif


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If the consumer makes the suggested extremely low minimum payment, it guarantees the creditor increasedprofits for a long period of time years, maybe decades. It is to the credit card providers advantage to keepyou indebted for as long as possible. Creditor wins; you lose.

Is there a happy ending?Here is a summary of the dirty dozen credit card traps:

The 0% APR is a marketing technique to gain new customers. It is temporary and often part of a baitand switch scheme in which you apply for the 0% APR credit card and are given a card with a muchhigher interest rate. Even if you do receive the 0% APR, the lenders strict terms and conditions increasethe likelihood of you losing the rate before the introductory term expires.

The default APR is the lenders highest interest rate. An increasing number of good credit customers arebeing charged this penalty rate, at the whim of the creditor.

A fixed APR is a meaningless term. Credit card providers can change the interest they charge to lendyou money at any time, for any reason. The fixed APR simply gives the consumer the right to be notifiedif the lender changes the interest rate for reasons other than those specified in the contract terms (i.e.,any reason at all). A variable APR can also be changed at any time by the provider, but in addition itvaries according to a national index, such as the Wall Street Journals survey of prime interest ratesamong U.S. banks.

Listing several APRs on credit card offers is a technique to confuse customers and prevent them fromcomparison shopping. It also makes it easier for a credit card provider to defend itself against lawsuits,since its advertising does not make a specific promise or claim to provide a certain interest rate.

Late fees are much higher than they used to be (currently around $40 or a percentage of the loanbalance), and are imposed much sooner than in the past (payment must be received before close of

business on the due date). Late fees are just one of a raft of financial penalties that credit card providersare using to increase their profits

Borrowing cash via your credit card is much more expensive than making a purchase, in terms of ahigher interest rate and a cash advance fee. The cash advance loan remains on your unpaid credit cardbalance the longest in order to maximize the creditors interest rate profits.

Credit cards that have added value for the holder have annual fees, some of which are quite expensive.For the wealthy consumer, added value can mean exclusive concierge and personal shopper services;for the consumer with damaged credit it can mean obtaining and rebuilding access to credit. For those inbetween, added value can mean accumulated rewards such as free airline tickets. In all cases, theconsumer should evaluate the annual cost of the card in relation to its value-added reward.

Charity affinity cards are a deceptive marketing technique, designed to appeal to the consumers heartin hopes she will forget to use her head. Suspiciously, most charity credit cards do not disclose theamount that is donated to the charity, and when they do, the percentage is infinitesimal.

Two-cycle balance computation is a method of computing finance charges that is more costly to theconsumer than the average daily balance method. Because there is no specific number (as with an APRor a fee) listed in the credit card offer disclosures, it is easy to overlook this trap, which could be anexpensive mistake for those who do not pay their credit card balances in full every month.

Some credit card providers charge non-usage or inactivity fees. Although this is not an issue for mostcredit card holders, since we use our credit cards daily, it is important to be aware of in certain cases.For example, you may be trying to improve your credit score by paying off a credit card and not using it.

Foreign transaction fees are another invention of credit card providers to diversify and increase theirprofit-making activities. Purchases and cash advances from foreign countries are charged a fee that isfrequently 3% of the purchase price.

Setting the minimum monthly credit card payment at a very low percentage of the loan balance is apractice that seems to be friendly to the consumer. It is not. Making low payments increases the cost ofthe loan and lengthens the time needed to pay off that loan.

Whether the ending is happy or unhappy is up to you. Because the credit industry is not currently under strictregulation by state and federal laws, it is free to engage in usurious and perhaps unfair business practices.Comparison shopping for the best credit card is less meaningful now, because the majority of credit cardproviders are using the above-listed traps. The first step is to be aware of the pitfalls, and then you can useyour knowledge to plan your finances wisely.

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