This is a guest post from John Ulzheimer. John is a recognized expert on credit reporting, credit scoring and identity theft, and is the Senior Columnist at Credit Card Insider. He is twice Fair Credit Reporting Act (FCRA) certified by the credit reporting industry’s trade association and has been an expert witness in more than 100 cases involving credit issues. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry.
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act) was enacted to protect consumers from unfair and predatory credit card practices. The reforms put into place through the Act have done a good job to curb and reduce some questionable credit card practices – retroactive interest rate increases, over-limit fees and shrinking grace periods, just to name a few. And while consumer advocates have applauded the Act’s influence on credit card industry practices, there are still some loopholes of which to be aware. Here are the ones you need to know:
Business credit cards aren’t covered
Shortly after the CARD Act went into effect, credit card issuers began increasing their marketing efforts to target consumers who owned smaller, home-based businesses with tempting business credit card offers. The catch, however, is that business credit cards are not covered by the CARD Act.
This means if you open a business credit card, the CARD Act provisions are irrelevant and all of the practices card issuers used prior to the reform are still perfectly legal. This certainly does not mean you should not open a business card for business needs. You just need to be cognizant that you do not have the same protections as you have on your consumer credit cards. Be thorough and make sure fully read and understand the terms and conditions on the business credit card before you open and use it.
Low APRs and 0% introductory offers
Credit card offers are designed to get your attention. Credit card issuers want your business and they are going to great lengths to make the offers compelling. Zero percent credit card offers abound these days and the offers are tempting, especially when you combine free money for the 12- to 18-month introductory interest rate period with no balance transfer fees that many issuers are promoting these days. What’s the catch?
1. You may end up with a higher APR than you thought. Credit card issuers know how to work their marketing magic to get your attention and their offers are designed to highlight low interest rates in big, bold print. If you look closely at the enticingly low interest rates on these offers, you’ll likely notice an asterisk that leads to the smaller print buried in the details.
Within those details you’ll find that the low interest rate is actually the lowest possible interest rate, which is usually reserved for consumers with the highest credit scores. There is also a much higher interest rate listed as a cap rate, which might be the one for which you qualify. Again, this does not mean you should not apply for a low-rate card offer — but you might end up with an interest rate in the 22.99 percent range.
2. Those great rates are temporary. When the introductory rates expire, the persistent interest rate will then apply. If you’re considering a 0 percent introductory or balance transfer offer, make sure you fully understand what your new interest rate will be after the introductory period ends.
It doesn’t take a math major to conclude that 0 percent is probably better than what you are paying now. These low-rate offers can be great deals, but less so if you are not able to pay off the balance, in full, before the introductory period ends and your rates skyrocket. Point being, use these cards as a way to get out of debt so you do not have to worry about interest rates.
3. Fixed versus variable interest rates. Prior to the CARD Act, most interest rates on credit cards were “fixed,” meaning the interest was set would not generally fluctuate. Not any longer. Now most credit card interest rates are variable, which means they can change over time.
Variable rates are tied to an index, like the prime rate. As the prime rate goes up, and it really does not have any other place to go, so goes the interest rate on your credit card. Variable rates are generally outlined in the fine print of your cardholder’s agreement and will vary from issuer to issuer.
Balance transfers & annual fees
Credit card companies make money from interest and fees. Two of the most common fees that consumers often overlook when opening a new credit card are balance transfer and annual fees. Annual-fee credit cards will often waive the first year as part of their promotional offers.
The fact remains, however, that every year thereafter the fee will be an additional expense for the privilege of carrying the card. If the benefits or rewards equal or make up for the annual fee, you should be happy with your card. If not, the annual fee may not be worth having that card.
If you are assessed a balance transfer fee then that is another cost of carrying the card you will want to consider. An 18-month, 0 percent balance transfer promotion is a great deal, but you will need to factor in the balance transfer fee, which can range anywhere between 3 to 5 percent, depending on the offer. Still, if you are paying a few hundred dollars to transfer a balance from a card where the rate is even 15 percent to a card where your rate is 0 percent that is a great deal.
Convenience checks & cash advances
Do you fully understand your obligations when you use convenience checks and take cash advances from your card? If not, you are not alone, as they can be very complicated. Before you decide to take out a cash advance on your credit card, make sure you fully understand the terms and conditions, especially the interest rate and fees associated with the withdrawal, which will not be the same as the rate you will pay on normal purchases. The fact is this: cash advances are expensive and are usually a poor financial move. Not only are the rates higher but you may also be asked to pay a cash advance fee, which is charged up-front when you initially take the advance.
Finally, depending on the issuer and their terms, taking out a cash advance can also automatically void your grace period. This means you will accrue interest on the money from the moment it hits your hands until it is paid back, thus negating the value of the card. Do your due diligence!