Beware of Credit Card Gotchas

Even if it sometimes seems like it, credit issuers aren't in the business of preying on the innocent. They're out to make money -- a lot of money.

And they do. American Express (NYSE: AXP  ) , JPMorgan Chase (NYSE: JPM  ) , and MasterCard (NYSE: MA  ) have all booked double-digit revenue gains over the past year thanks to big spending by average American consumers.

14.24% more ignorant
But gimmicks help, too. I'm talking about the fine-print acrobatics that credit issuers perform to keep interest payments flowing from debt-laden customers like me. Two-cycle billing is a good example. So is the 5% cash-back offer that applies only to purchases at your local grocery store every second Tuesday. At 5 a.m.

Fortunately, I've avoided both of these traps. But what finally snared me is equally nasty. I'll get to the details in a minute. First, rewind to June. That's when I first revealed my renewed struggle with debt. But I had a plan that included what seemed like a pretty sweet balance-transfer deal. "This week, I'm transferring the balance on the Cash Back [card] to a fixed 2.99% loan offered by Citi. The rate is locked for the life of the loan -- as long as we make timely payments, of course," I wrote at the time.

Sadly, I didn't read the fine print. How stupid. Turns out the transferred balance was fixed at 2.99%, but all new purchases would immediately begin accruing interest at 14.24%. And, worst of all, my payments would apply to the lower rate first.

Did I think of that? No. So, whenever I couldn't use my American Express, I used the new Citi card, figuring -- naively -- that I'd pay off new charges each month as I snowballed extra funds into larger, higher-interest debts.

Back on the boards
Now I know better, and I've halted spending on my Citi card. Still, my earlier ignorance comes with a cost. As of today, I have $14,283.17 in debt remaining on the account, with a little more than $1,000 accruing interest at the higher rate.

But that's not as bad as it might seem. Thanks to some well-informed Fools on the Credit Cards and Consumer Debt discussion board, I've learned that my combined rate is still less than 4%, which means we're best served by snowballing extra payments into our higher-interest home equity line of credit, which charges 8.25% as of this writing.

In the meantime, I've begun looking into a new zero-balance card for when I can't use American Express. Both my wife and I have a credit score above 750, so getting a deal shouldn't be a problem. (Find out why.) I'll just be sure to read the fine print next time.

Follow the money
Credit issuers aren't evil by nature, but their products can be, if used improperly. So watch out for the traps -- especially those offers that seem just too good to be true. It's a good bet that they are.

Have other money tips? Tell me. I'm writing new articles on personal finance and investing basics every week as part of our new money management service, Motley Fool GreenLight. It's tailor-made for Fools like you who aim to take control of their financial destiny. Click here to learn more.

JPMorgan Chase is a Motley Fool Income Investor recommendation. MasterCard is a Motley Fool Inside Value pick. Check out either service free for 30 days.

Fool contributor Tim Beyers, ranked 1,258 out of 18,140 in Motley Fool CAPS, is grateful for the Fools at the Credit Cards and Consumer Debt discussion board. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get a peek at everything he's invested in by checking Tim's Fool profile. The Motley Fool's disclosure policy won't charge you a penny in interest.

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10/24/2016 4:01 PM
AXP $67.09 Down -0.27 -0.40%
American Express CAPS Rating: ****
JPM $68.87 Up +0.38 +0.55%
JPMorgan Chase CAPS Rating: ****
MA $103.19 Up +0.34 +0.33%
MasterCard CAPS Rating: *****