Gather Little by Little

Photo by: biskuit

My level of detest I have for credit cards and credit card companies is no secret. I’ve many times about the shady tactics of credit card companies and how they prey on people in need. Credit Card companies not only issue credit cards, process credit card transactions, market and sell credit cards but they also aggressively look for ways to make themselves more profitable. Here are just a few of the many secrets credit card companies don’t want you to know:

Credit Card Statistics

According to CreditRatings.com:

• The credit card industry is the most profitable one in the United States with annual earnings in the $30 billion range (Just to give you some perspective, Citibank earns more profit than both Microsoft and Wal-mart.
• Around 640 million credit cards are in circulation in the United States with about $750 Billion and $800 Billion in credit card balances based upon Federal Reserve figures.
• From 1996 to 2005, the total number of bank credit cards increased 46%. (Card Industry Directory 2006, Chapter 1)
• Credit card companies made $43 Billion in fee income from late payment, over-limit, and balance transfer fees in 2004
• According to the October 11, 2006 Government Accountability Office (GAO) report, late payment fees averaged $34 in 2005 which is a spike of 115% from $13 in 1995.
• Credit card usage grows with 14% Americans holding more than 10 cards per Experian. That’s around 1 in 7 Americans. This is up from 10% in 2004.
• On average, 39% of Americans pay their credit cards off in full each month in 2004. This means, that on average, around 60% carry a credit card balance.
• Myfico.com information shows that about 40% of credit card holders carry a balance of less than $1,000.

Some cards have no grace period

While I strongly feel you shouldn’t use credit cards at all, if you do, one of the most important things you need to do before signing that application is read and understand the terms. Often referred to as the fine print, the terms contain all kinds of interesting and potentially costly items you need to be aware of. In the past, it has been generally accepted that you have a 30 day interest free grace period from the day the credit card company receives your transaction. Some newer cards now coming into the market have 20 day, 10 day and even 0 day grace periods for purchases. This is not something they advertise and is generally hidden in the fine print.

In order to avoid paying interest on items, ensure you understand the terms of your grace period and pay attention to any changes. Make sure you payoff purchases inside of the grace period to avoid unnecessary interest charges.

Bait and switch

Ever received one of those 0% credit card offers and think to yourself, “I can transfer my high interest debt over and save a great deal of money.” I have, many times. How many times have you actually received a 0% card with a reasonable available credit limit so you can transfer money your debt over? If you currently have debt, more likely than not you haven’t.

This is a common bait and switch tactic the credit card companies use. They send you an attractive offer, you apply, but what they approve you for and send out is a completely different card all together. Their hope of course is that you’ll keep it and use it anyway, only adding to the number of cards and debt you have.

If you don’t receive the card you want, call them and see if they’ll meet the deal. If they won’t, cancel the card (get a confirmation in writing) and cut the card up.

Change their payment address

While this hasn’t personally happened to me (at least without adequate notification), I’ve read of a number of of situations where the card companies change their payment address or P.O. box without clearly telling you. The hope of course is that your payment mailing gets delayed and they can hit you up with a hefy late fee.

If you mail in your payment, check the payment address on your credit cards statement each month to verify you are mailing your payment to the proper and current location. Better yet, make your payment online to both avoid the mail delay and the address problem all together. Late fees on cards can be expensive (I know mine are $35.00).

Card card theft insurance, disability insurance, or insurance at all

Most large credit card companies offer various types of insurance, from theft insurance, life insurance, disability insurance, and pay-off insurance. Don’t confuse credit card companies with insurance providers. First off, your only liable for up to $50.00 in liability anyway. Second, it is far cheaper to get these services from other providers specifically in the insurance business. I read one story recently that discussed a worker that became disabled, and he was never able to receive his disability even after taking the card company to court.

You Don’t Need Cash

Credit Card companies love it when you take out cash advances. They get you coming and going. First, they charge an initial transaction fee, usually between 2 and 5%. Once you receive your cash, they begin accruing interest immediately. In most cases, the interest rate for a cash advance is also much higher than your rate for purchases. A far better an less costly option is to establish an emergency fund, and if you find you need some additional cash, pull from there instead. The price you pay for using credit cash advances is far too high and is one that you will continue to pay and pay on.

Amount of time to process a payment

Here is a trick credit card companies love to use. Did you know that on average it takes 7-10 days for your mailed payment to post (2-3 days postal & 5-6 days to process) to your account? The card companies really try to get on this one as well. They do so by mailing your statement out such that you only have 10-15 days before your payment due date. Their hope is that you won’t pay right away and they can stick you with a late fee.

To avoid this, make your payment electronically the day you receive your bill. I use online bill pay, but most large card companies allow you pay using their websites as well. This reduces the lead time to 2-3 days, and it some cases the payment is made immediately.

If you do get charged a late fee, call the card company immediately and ask for the fee to be waived. Most companies will do this 1-2 times every 6-months without any hassle.

Another item related to late payment is immediate increase in rate. If you have a promotional rate in place and miss your payment due date by a day, your rate will most likely skyrocket to a much higher rate. If you have a standard rate in place, and make a late payment, you can expect the rate to increase as well, sometimes well over 20%!

The Universal Default Clause

There has been a great deal written recently on the universal default clause. The clause is what allows the card company to charge you significant late fees, and increase your rate, frankly whenever they want. How can that be legal?. The answer is located in the fine print of your credit card agreement and is legally referred to as the universal default clause. According to the Institute of Consumer Financial Education, currently almost 40 percent of credit card issuers apply this policy to their customers.

The default clause also generally allows the card company to routinely monitor your credit file. So a creditor with a universal default clause will be watching — and waiting. What this means is that any late payment, whether it’s on your utility bill, home equity loan, or Target credit card, acts as a trigger allowing the bank that issued the card to double or even triple your interest rate overnight. The icing on the cake is that your credit score gets dinged too.

Under the universal default clause, your interest rates can be increased for several other reasons, including exceeding your credit limit, bouncing a check, having too much debt, having too much credit, getting a new credit card, applying for a car loan, and applying for a mortgage loan. Surprised? Don’t be, remember there is a whole team of people working at your friendly credit card company focused on figuring out how to do things like this.

What can you do?

The most important thing you can do, at least in my opinion is to “not dance with the devil“. Cut up your cards and stop using them all together. Make your payments on-time, and pay as much as you can towards them. Get a little unexpected cash? Make a snowflake payment.

Once you card is paid off, close the account. This may hurt your credit a bit in the short term, but eliminates a far greater risk in the long term. Just imagine how much better you’ll feel not having the dark cloud of debt floating over you, and not having to worry about those credit card companies that really are out to get you.

Zero Percent Balance Transfer Credit Card

The only time you’ll hear me recommend a credit card is when you are currently floating credit card debt on high interest rate card. In that case, I would strongly advise you to transfer that balance to a zero percent balance transfer credit card, such as the Discover more card.  I recently switch to a Discover More card from a 29.9% interest rate Bank of America card and am literally saving myself more than $100 per month! You can make this switch with absolutely no cost!