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How To Avoid The Hidden Costs Of Credit Card

Mar 30, 2008
Those of you with credit cards should already know the importance of paying on time and keeping your balances below the credit limit. Failing to do either can cost you in fees and higher interest rates. You may know about the Universal Default Clause, which allows creditors to raise your rate because of something they see on your credit report such as a score drop or being late on another account. However, you may not be aware of some of the other ways you can trigger a fee or a rate hike, so I've assembled a list of some of the lesser known ways you can be penalized along with some tips on avoiding them.

Late Because of Slow Mail: If your payment arrives late to the creditor, you will be charged a late fee regardless of how early it was mailed. Once your payment is received, the envelope is destroyed so you can't ask the creditor to check the postmark. The Post Office does a fine job overall but sometimes envelopes are delayed or even lost, especially around the holidays. Being late, sometimes by one day, can also be a reason for the creditor to cancel a promotional rate or increase your regular rate. Also, some creditors delay posting your payment by as much as 5 days if you mail it in something other than the envelope that arrived with your statement. What to Do: Pay online at the creditor website. Your personal bank may offer online bill pay, but if they mail checks to your creditors you really haven't solved the problem. Payments made directly at the creditor website are usually free unless you pay at the last minute, which brings us to their next thing you need to know.

Almost Late Fees: If your payment is due in less than 2 days, mailing it is not an option. Making a payment by phone could cost you as much as $15. Internet payments can take a few days to post, so unless you agree to pay a rush payment fee, you could pay a larger late fee and risk a rate increase as well. In other words, you pay fees to avoid fees. What to Do: Avoid paying at the last minute. Call your creditors and move your due dates if necessary. If you would like to pay your credit cards in the middle of the month, make sure that your due dates are at the end of the month and vice versa. Be careful doing this though, because...

...You Can't Pay Ahead: In the past, you could pay extra one month and cover some or all of your minimum payment for the next month. Today, credit card companies must receive one payment in each billing cycle, which is the time between one bill being generated and the next. It typically starts 5 days after your due date. So if you want to pay early because you are going on vacation, you had better make sure that you're not paying before the start of your next billing cycle or you could be hit with late fees, trigger a rate increase and even affect your credit report. What to Do: Online payments can be scheduled in advance. Just be careful to note when it will be debited from your bank account.

Fee Fees: If you go over your credit limit, you can be charged an over limit fee even if it was another fee that put you over. Annual fees, late fees, and even your monthly finance charge are frequently the culprits, but a rush payment fee on a low limit card can make enough of a difference to put you over. What to Do: Don't go anywhere near your credit limit. It's better for your credit score anyway. If you do go over your limit, the next scenario becomes an issue for you.

The Undercharged Over-Limit Bill: Going over the limit triggers a fee that pushes you even further over. Your statement shows a minimum payment of exactly the amount you are over. If you pay the minimum, the finance charge on your next statement will put you over again and cause another fee. What to Do: Pay the amount you are over the limit PLUS the amount of a normal minimum payment. That should put you at a safe distance below your limit, unless you have credit protection.

Credit Protection Trap: Your minimum payment is calculated to cover the monthly finance charge plus a small portion of the balance. Credit protection plans are billed as new purchases, so your balance could be going up if you only make minimum payments. The product that is supposed to help you pay for the card if you're out of work could actually keep you working for the rest of your life to pay for the card. What to Do: Save your money. Three to four months of credit insurance is typically enough to cover one minimum payment. You can earn interest by putting that money into a savings account rather than pay interest for insurance, and your credit card balance will be going down.

Breaking the Fixed Rate: If you think that you will have your fixed rate for as long as you have the card, you will probably be wrong. You'll have your fixed rate for as long as your creditor says you have it. Every credit card agreement states that the rate can be changed at any time for any reason, as long as they notify you. By ignoring the notice you are agreeing to the increase. What to Do: Read anything they send you. If the rate increase is not triggered by one of the many default clauses in your agreement, you should have the option to close the account and pay the remaining balance at the old rate.

Replacement Card with a Hitch: When your old card is expiring, you will usually receive a replacement card in the mail and frequently, changes in terms are included. By activating the new card, you are agreeing to the terms in the new agreement which may include a rate increase. What to Do: Again, read everything that they send you and ask questions if the terms are not clear.

Lowest Rate First: When you have multiple rates on your credit card, the creditor will apply every penny of your payment towards portion of the balance with the lowest rate. This keeps the higher rate balances growing and growing. What to Do: Know the terms. Don't use a card for higher interest transactions when you have a promotional rate. If you have a card like the one in the next segment, you may have no choice but to use the card.

Use This Card, Or Else: Many promotional balance transfer cards require that you use the card periodically for purchases or they cancel the promotional rate. Using the card for higher interest purchases gives you the problem described above. What to Do: Read everything before you apply for a card. Look for a card that is suitable for the way you want to use it. If you already have a card with a minimum usage clause, study the terms and use the card for the bare minimum allowable to keep your promotion active.

Balance Transfer Fees: Many special deals on balance transfers are not so special. Zero percent interest for 6 months may not be a justification for paying a 3% transfer fee on the total balance. What to Do: Look for balance transfer fees in the fine print. There are many cards that offer transfers without fees.

The Rate and Switch: You may not be getting the card you think you're getting. Frequently, credit card offers have a clause that allows them to issue you a card with less favorable terms if they don't approve you for the great terms they advertised. If you activate the card without reading the cardmember agreement, you have just said "yes" to whatever terms they assigned to you. What to Do: Read everything before you activate the card. You still have the right to decline it.

None of the above really comes into play if you use the best strategy for having credit cards. Don't carry balances. Credit cards can be convenient, provide a measure of security for many purchases and if used properly can contribute to a great credit score. If you aren't paying them in full at the end of each month while adding money to your savings you may be walking a dangerous financial path. Plus, it just allows your creditors more opportunities to reach into your pocket.
About the Author
Kevin Maher is the Agency Liaison at Debt Management Credit Counseling Corp (DMCC), a 501c(3) non-profit charitable organization offering free financial education and budget counseling across the USA. Call us at 866-618-DEBT or by visit http://www.dmcccorp.org. Email Kevin at kevin@dmcconline.org
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