8 ways credit cards may cost you more than they should

You pay for convenience. That's the simple reality of economics. Having a cab — or even an Ubermobile — pick you up is more expensive than catching a bus. Eating out costs more than making a meal yourself.

Woman consider which credit card to use

So, when you consider the tremendous convenience credit cards offer, it should be no surprise that consumers end up paying a hefty price to add convenience to their lives. In many cases, though, the price is higher than it should be.

You can't fix everything about the high price of credit cards; but the more you know about the various ways they can cost you too much, the more you can eliminate at least some of that unnecessary expense. Here are eight examples:

1. Credit card rates never really came down.

Managing credit card costs is especially important today because those costs are disproportionately high. Consider two types of interest rates — the ones banks pay you, and the ones you pay credit card companies. While the rates banks pay deposit customers have dropped sharply in recent years, credit card companies have managed to keep the rates they earn consistently high.

Most interest rates plunged as a result of the Great Recession. At the end of 2007, just as the recession was about to start, 6-month CD rates averaged 4.85 percent. They average just 0.12 percent today, a decline of 4.73 percent. In contrast, credit card rates averaged 14.38 percent at the end of 2007, and today average 13.49 percent, a decline of less than 1 percent.

Those changes have tipped the balance against consumers. That makes this a crucial time for consumers to look for every chance to get on even footing.

2. Advertised rates may be very misleading.

One way you can fight back against the high cost of credit cards is to shop around for the best interest rates. Unfortunately, when looking at credit card rates, what you see isn't always what you get.

Most credit cards don't advertise a single interest rate, but instead offer a range of rates. That range can be wide enough to drive a bank truck through: Gaps of 10 percent between the high and low rate in a credit card offer are not unheard of. While the low end of the range might make a given credit card look good compared to other credit card offers, the rate you get depends on your credit standing.

So, before you sign up for a credit card, find out what rate someone with your credit score will be paying — especially if a huge range exists between the high and low rates offered. Overlooking this step could end up costing you dearly if you are placed on the wrong end of that range.

3. You will pay for your credit mistakes.

As alluded to above, credit card rates are based in part on your credit rating, and this can change after you sign up for a card. So, if your credit deteriorates, expect to pay more on future charges.

In addition, credit card companies change their risk assessment models depending on prevailing economic conditions. This means that if you already have a few bad marks against your credit record, even if you don't have any subsequent problems after signing up for a credit card, the credit card company might decide to start charging you more if it deems that credit conditions have generally gotten riskier.

Of course, the ideal solution is to keep your credit squeaky clean; but at the very least keep an eye on the rate you are being charged, because it can rise even if the advertised range of rates for a card does not change.

4. Rewards may not be so rewarding.

Rewards of cash back or merchandise credits have a psychological appeal, but rewards cards generally carry higher interest rates than non-rewards cards.

If you are paying interest on a credit card balance, you need to compare how much extra you are paying for the rewards program compared with what you get out of that program. There is no point in paying 3 percent more interest just to get 1 percent cash back.

5. Complacency hurts.

Credit card companies are very aggressive about going after new customers. Once you have their card, though, they figure you will keep using it for a long time out of force of habit. But that could actually prove to be an expensive habit.

Credit card companies can change their rate strategies at any time. A card that was competitive when you signed up might have drifted toward the higher end of the rate market. So don't get complacent. Compare rates regularly, and make each card re-earn its place in your wallet at least once a year.

6. Prioritizing your plastic is critical.

There are valid reasons to carry multiple credit cards, but always be aware of which cards have the best rates. Prioritize your credit card usage so that you make new charges on the ones with the lowest rates, and make the biggest balance payments on the ones with the highest rates.

7. The devil may be in the details.

Sometimes you have to hunt a little to know what is really going on with your credit card. Credit card companies are obligated to send you a notice when they raise your rates, but the relevant information can be hidden in a dense forest of bank jargon.

Often, the best way to keep abreast of what is going on with your account is to go over each statement carefully. This will tell you what the current rate is, and show you whether you are being charged any fees in addition to interest. Carefully scrutinizing your statements will also help you spot unauthorized charges — especially since sophisticated scam artists don't go for big obvious bogus charges, but try to bleed your account repeatedly over time with more subtle ones.

8. Zero percent balance transfers may not really be free.

Credit card companies might offer you a zero percent card for a period of time to get you to transfer an existing balance to their cards. Just be sure you check for any balance transfer fees that might apply — these can be more costly than the interest you would have paid.

Sometimes paying for convenience is worth it; but oftentimes, the desire for convenience is strong enough to allow companies to take advantage of consumers. Credit cards can be a very convenient financial tool, but with a little diligence they can work to your advantage rather than that of the credit card companies.

Have the interest rates on your credit card accounts gone up or down unexpectedly in the past? How do you avoid drastic plastic decisions? Do you shop for credit cards as a way to minimize the interest you pay for convenience?

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Beth
Beth
4 years ago

My strategy is very simple:

1) Use credit card only when there’s already money in the bank to pay for the purchase.

2) Pay the balance off every month.

3) Regularly check statements for suspicious activity.

For me, a credit card is just another payment method. IMHO, the best way to best way to avoid the games credit card companies play is to be indifferent or ambivalent to them.

Some Guy
Some Guy
4 years ago
Reply to  Beth

That’s basically how I use my credit card. I track all of my finances in a single spreadsheet that I created for myself. When I look at the “available” balance in my checking account, the number that I use is one that has money already set aside for future bills, what I intend to move over to my savings and to cover the current balance on my only credit card. I update my spreadsheet a couple times a week so I have an accurate idea of how much I have available. When my credit card’s cycle closes, I immediately pay… Read more »

Jerome
Jerome
4 years ago
Reply to  Beth

Exactly, that is how you use a credit card wisely. Credit cards can give you a range of small and big benefits, but only if you do not use them as a way of getting credit.

Dave
Dave
4 years ago
Reply to  Beth

Agree with all the comments here!

And IMHO – who really does ‘shop for the best rates’ on credit cards? Folks strapped with credit card debt who are actively looking to take on more? The whole ‘shop for the best rates’ is really a moot point if you ask me.

Beatrice
Beatrice
4 years ago
Reply to  Beth

I agree 100% That’s how I use my CC’s. Using the credit from credit cards is a poor financial choice. I use the for 2 reasons: the reward miles from mine for travel (even a round trip to Europe for 2) and to build up my credit score. The only cost form my card is the annual fee, which the article fails to mention as part of the cost.

lmoot
lmoot
4 years ago

I’ve never had to care about rates because I’ve never been in a position to have to pay them. In addition to using cc’s to build credit for free by paying off balances each month, I have also used them frequently in the past as free loans. I’ve used 0% “loans” to renovate my house (required renos), pay for an expensive plane ticket to visit family, and to help fund a 6 month break from working full time. I’ve never had a problem paying the money back or on time and I feel comfortable enough with cc’s and my ability… Read more »

Paul
Paul
4 years ago

I avoid using credit cards most of the time. I am a proponent of Dave Ramsey’s advice on credit cards. In the past few years, the only time I have used my credit card is for business travel and a flooded basement. I was reimbursed for the business travel and paid off the card for the flooded basement after receiving a bonus from work, which I knew was coming. These days I do not make purchases with my credit cards. Dave advocates cutting them up and closing all accounts. I am not quite ready for that step, though I have… Read more »

Dave
Dave
4 years ago
Reply to  Paul

You da man, Paul!

Taka
Taka
4 years ago
Reply to  Paul

Totally agree Paul.

I have a few credit cards, but only use them for emergencies (which are extremely rare), for travel (they have lots of perks like no international fees, baggage loss protection, and flight cancellation protection), and work reimbursements (which get paid back bi weekly).

Not for personal use outside of those situations. It’s a good way to avoid getting in hot water.

Another Beth
Another Beth
4 years ago
Reply to  Paul

I used to be anti-credit cards. But since I’ve had to use it to pay for a big car repair and other big expenses, it’s nice to know I can use my card without having to get to the bank. I do pay my bill in full and on time, and I only charge what I know I can afford to pay when the bill arrives.

Sanjeev
Sanjeev
4 years ago

Good Article Richard !! These days I seldom use credit cards. If I use it, I promptly pay within weeks. I know there are reward points, frequent flyers points and others blah, blah, blah but importantly, I know myself and my lazy habits. In the past, I have paid so much in late fees and interest. Now, I am smart. I do not want to pay anything anymore. Credit card companies pay many tricks. I feel that over 90% of the people are not disciplined enough to open the mail, check the accounts and pay on time. These people are… Read more »

JohnG
JohnG
4 years ago
Reply to  Sanjeev

My family’s experience is that credit cards provide much better protection against fraud. My son had a terrible time recovering his money after his debit card number was stolen.

Sophie
Sophie
4 years ago

What?!?

When did Get Rich Slowly become a traditional personal finance site? The whole GRS ethos is against credit card use unless you can pay the bill in full every month (in which case, the interest rate on your credit card is a moot point!!). If you are carrying a balance, you should not be using your credit card.

Can anyone tell me why this article belongs on the GRS I know and love?

Glorified Plumber
Glorified Plumber
4 years ago

Interesting the commentary regarding use of credit cards. The dislike and distrust seems to stem from hard opinions on debt and the use of debt. Several folks have referenced DR, several have expressed disgust at the concept of paying someone else interest, or at how high rates are. To me, all of these concerns really seem to have nothing to do with the credit card itself, the credit card is simply the enabler of bad behavior. I realize that people find solace in DR and other programs like his because it enables them to deal with bad behavior on their… Read more »

Beth
Beth
4 years ago

A credit card to me is essentially the same as a debit EXCEPT when I shop local and at small businesses because they get hit the hardest with credit card charges. (up to 4% of your purchases, including the tax.) Larger companies pay less in merchant fees because they have a much higher volume of transactions.

Credit card companies aren’t just getting rich from people who don’t pay off their balances. They’ve got a lot of cash coming in from retailers too.

Laura
Laura
4 years ago

This article is good for people who plan on using credit cards to borrow money they plan to pay back over time and are looking to minimize their interest rate. But that’s not part of Getting Rich Slowly; with most credit card rates near usury levels, that’s Getting Poor Quickly. I’m squarely in the camp that credit cards should be used only as a purchasing tool with the amount borrowed paid back within the month to avoid being charged interest at all. Credit cards make for lousy long-term loans. I still hate credit cards but need them as a tool;… Read more »

lmoot
lmoot
4 years ago
Reply to  Laura

“Credit cards make for lousy long-term loans.” I dunno, my 2yr interest-free $8000 “loan” which I put on my Home Depot card for roof replacement would disprove this comment. So would my 2 yr 0% 4k AC, and 18 month $7k kitchen remodel and appliances. There is literally no 2yr 0% interest free loan in existence…other than a credit card. So, what does make a great long-term loan? It would have to beat 0% + min 2% rewards. It would have to be a loan that pays YOU to borrow (1% rewards + 1% earned in interest in cash not… Read more »

Ross Williams
Ross Williams
4 years ago

Credit cards cost you nothing if you pay them off every month. They are, however, an easy way to go in debt and you will pay through the nose for that convenience. Home equity loans or other lines of credit are available at far lower cost.

If credit cards are the only thing available to you, then consider the full cost before you buy something. This may mean having two cards, one that you use for credit purchases and one that you pay off in full every month. You don’t want to be paying interest on your breakfast tab.

My Factoring Network
My Factoring Network
4 years ago

Credit cards can be expensive stuff for anyone, if not used wisely. The income level should be taken care whenever one is using credit card. It pays you for some time and has a hidden interest for you. Make sure you use it wisely.

Rob
Rob
4 years ago

A while ago (about 4yrs) a big card company gave me the choice of keep the card and they raise the rate fromm 8% to 12.9% or freeze the account and just make the payments. They were doing this accross the board when the new card rule legislation came into play. I chose the latter and will finish paying it off at the end of the year. I think we should be able to write the interest off our income tax since it is income for the banks. Anyway, we also recently started using cash at stores because after testing… Read more »

Marcin
Marcin
4 years ago

Credit cards are not for everyone. Especially shopaholics should avoid them. I know sometimes credit card might save you live, but without it it`s easier to manage household finances. You don`t spend what you don`t have.

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