March 9, 2007
Do you harbor a love-hate relationship with your credit card?
There are lots of reasons to love a credit card, starting with the convenience and financial tracking that accompanies paying with plastic. Don't forget the perks, like cash and airline miles, which could help make your fantasies of a Hawaiian vacation a reality. But there are also plenty of reasons to feel less than enamored with that little piece of plastic.
Credit card practices have become a hot topic on Capitol Hill, and lawmakers this week tried to shine a bright light on some of the policies they don't like. A panel of senators called in executives from Citibank (NYSE: C ) , Bank of America (NYSE: BAC ) , and JPMorgan Chase (NYSE: JPM ) to explain some of their practices.
Two of those companies, Citibank and Chase, had recently announced some consumer-friendly changes. Nevertheless, the lawmakers had a raft of complaints about the industry in general, which make for a good reminder why carrying credit card debt can get very expensive, very fast:
- Disappearing grace periods. If you pay your balance every month, you have a short time before interest will be charged on your new purchases. Not so if you're carrying credit card debt month to month. In that case, new purchases almost always start racking up interest costs immediately.
- Double billing. If your credit card uses double or two-cycle billing to figure the balance subject to finance charges, be prepared to pay more. When using double billing, the credit card will use the two prior months' worth of charges to determine your balance, whether or not you carried a balance the month before.
- Trailing interest. This is interest that accrues while your check's in the mail. Mail a check to your credit card to pay off a balance and, even if it gets to the credit card company by the due date, you'll still be liable for the interest that accumulated since the time your billing cycle ended.
- Different interest rates. Expect different -- and changing -- interest rates depending on whether you're making purchases, asking for a cash advance, or transferring a balance.
- Penalty rates. Expect your interest rates to go up if you pay late or exceed your credit balance, in addition to paying a late fee. Also, expect that these penalty rates may apply to your outstanding balance, even if you charged those purchases when your interest rate was much lower.
- Teaser rates. Although the initial interest rate charged by a new card might sound great, it might not last for long. Often, an introductory rate applies for only a short time, or only to a transferred balance. Make a monthly payment even a day or two late, and your teaser could go away faster than you can say "Charge it."
- Payment allocation. Send a check to your credit card company, and odds are that your low-interest balance will get precedence over any higher-interest purchases. Your higher-interest balance will hang out there, accumulating finance charges, while you work through the lower-interest balances.
- Credit card fees. Expect to pay a fee if you exceed your credit limit, even if the credit card issuer approved the transaction. Also, expect to pay a fee if you think a mailed check won't get there in time, and you want to pay by telephone instead.
- Fees added to your balance. As the fees pile on, they'll be added to your monthly balance, and they may accumulate interest just like your outstanding debt.
- Confusing disclosures. Try reading your card agreement one day. You may not know what the agreement's talking about, but you'll definitely know what those senators were talking about.
Had enough? Not every card has every one of these problems, but even just a few can get you in over your head. Head over to the Credit Center to find help and get out of debt. If you need more help, use this free guide.
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Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article. She welcomes your feedback. The Motley Fool has a disclosure policy.