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6 Secrets That Credit Card Companies Don’t Want You to Know
Those credit card companies are a wily lot. They must meet the letter of the law as expressed in the CARDS Act and other legislation, but there are always gray areas (or rather, areas relegated to the fine print) that they can exploit. As a sophisticated consumer, you need to know what to look for in a credit card agreement so that you understand your rights.
1. One Late Payment Can Trigger an Avalanche
You are a busy person, and it’s quite possible that you might forget to make your monthly credit card payment on time. The card company, you’ll find, has no sense of humor about this, and can hit you in several ways:
- Late fee: Even if you are just one day late, expect a late fee to be assessed. These fees typically hover around $35. That’s a real bummer if your balance was only $20.
- Penalty APR: You might be paying a low credit card APR, but if the card has a penalty APR clause, your interest rate will skyrocket after a late payment. Many credit cards charge a penalty APR of 29.99% and higher. The interesting thing about a penalty APR is that once invoked, it never goes away. That is harsh.
- Falling dominoes: A late payment on Card A can raise the APR on Card B if both cards are from the same issuer. So, if you have three Chase credit cards and miss one payment, Chase can invoke the penalty APR on all three.
- Cancelled promotion: If you miss a payment while participating in a 0% introductory APR promotion, the card issuer can cancel the deal and start charging you the regular or penalty APR.
- Tattle tale: If your payment is more than 90 days late, you can bet your card issuer will report you to the three major credit bureaus (Experian, Equifax, and TransUnion). That will crash your credit score and remain on your credit report for six years. The company will also probably send your debt into collection or write off your account, things that stay on your reports for seven years.
2. An Excellent Credit Score Doesn’t Guarantee Acceptance
Even with an 850 FICO score, a credit card issuer may turn down your card application if you already own too many cards. The definition of “too many” varies with the issuer. For example, Chase has its famous 5/24 Rule that says you can’t get a new Chase card if you opened 5 or more card accounts in the last 24 months. Those 5 cards can be from any issuer – they don’t have to be Chase cards. Other issuers with restrictive quotas include Citibank, Capital One, Discover, and American Express.
3. Grace Periods Vary (If They Exist at All)
Your card’s grace period extends from the end of the billing cycle to the payment due date. Most high-quality cards set their grace periods around 25 days, during which your new purchases won’t trigger interest charges. Some issuers set the period lower, around 20 days, and a few omit grace periods entirely. Cards with no grace periods are typically aimed at consumers with bad credit. If you don’t pay your balance on the day you use this kind of card, you’ll be hit with interest charges that accrue daily until you pay your balance. Avoid these cards if you can.
4. Your Fixed APR Isn’t Fixed
Even when advertised as a fixed APR, your interest rate can change after an introductory period. Typically, your interest rate is figured by adding an increment to the Prime Rate. When the Prime Rate changes, so will your APR. Well, not always – when the Prime Rate rises, your APR will immediately increase. But when the Prime Rate falls, your old APR will be sticky – slow to move downward. You’ll be notified at least 15 days in advance before an APR hike, usually by mail.
5. Read the Schumer Box
The Schumer Box is a standardized table that reveals certain credit card information, including fees that aren’t advertised on the card’s signup page. The lower the card’s target credit score, the more fees you’re likely to encounter. For example, some cards charge an origination fee and annual fee up front, so that you owe money as soon as your card arrives. There may also be monthly maintenance fees, cash advance fees, late fees, returned payment fees, and more. You’ll also see your astronomic APR and your minimal grace period.
6. Cash Advances and Balance Transfers Charge Fees
You might sign up for a card featuring an 18-month 0% introductory APR for balance transfers. You can consolidate your other card balances to your new card and avoid interest for 18 months, but each transfer will cost you from 3% to 5% of the transferred balance. That’s up to $50 on a $1,000 transfer.
If you would like a cash advance, be aware that:
- You will probably be charged a fee of at least 3%.
- Your cash advance APR might be considerably higher than your purchase APR.
- There is no grace period for cash advances. Interest accrues from the first day.
- Your cash advance limit may be much smaller than your overall credit limit. For example, many cards set the cash advance limit at 30% of the credit limit.
- Cards for bad credit might not offer cash advances.
Bottom Line: Always read the fine print before signing a credit card agreement. What you don’t know can hurt you!
Eric Bank is a business and personal finance writer who has been featured in Credible, Wisebread, CardRates, Zacks and many other outlets. He holds an M.B.A. from New York University and an M.S. in Finance from DePaul University.