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.
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?
Richard Barrington, CFA, is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc.