Credit cards have become a ubiquitous part of the American economy. More than 145 million citizens use them, and businesses often have multiple credit cards account. While most people are aware that they’ll have to pay a price in the form of interest for the privilege of borrowing the credit card companies’ money, some credit cards come with hidden costs that cardholders aren’t savvy enough to see in their statements, or that they become painfully aware of later.
There’s little wonder why credit cards have become so widespread in the American and global economies. They’re easier and more convenient than cash or checks, and can provide an essential lifeline in emergency situations. Nearly 40 percent of American credit cardholders carry a balance from month to month, reaping billions in yearly profits for credit card companies from interest alone. Along with interest however, there are other revenue streams credit card companies derive from their business, some of which are obscured from the awareness of most customers. Some of these hidden costs are built into the cardholders regular monthly statement, others are triggered by specific events or circumstances.
For starters, many credit card companies have clauses in the credit card agreement that penalize cardholders for falling behind on payments to other accounts, even if they haven’t missed a payment to that particular account. Universal default, as it’s called, can jack up the monthly interest rates to 29 percent or more. With some cards, universal default can be triggered if you miss just one payment to another credit account.
Universal default has been widely derided as an unfair practice, and recent legislation has banned credit card companies from applying universal default rates to current balances. However, if a cardholder triggers his or her charge accounts universal default clause, this rate can still be applied to new purchases on that account. For example, if a cardholder with a $1,000 balance on an ACME card account triggers the universal default clause by falling behind on a payment to another creditor, ACME cannot apply the new 29 percent interest rate to that $1,000 balance, but it can apply the rate to new purchases.
Low minimum payments may sound like a blessing, but if you only make minimum payments, you’ll take longer to pay off your debt, and end up paying much more in interest. New regulations have required most credit card companies to increase minimum payments from 2 to 4 percent of the card’s outstanding balance each month.
Another hidden cost cardholders often get popped with are rate changes or changes to teaser rates. Many credit card companies hook new customers with low introductory rates that can be as little as zero percent. These rates usually go up after about six months, and card holders must then pay a higher rate. The teaser rates are good for customers who wish to transfer existing debt to the account and then pay it off quickly, but if these cardholders are undisciplined, they could end up paying higher rates on unpaid balances.
Many cardholder agreements also give credit card companies the right to change rates and fees for any reason with little notice. Recent federal regulations have clamped down on this practice, but card companies can still make changes, and fairly quickly.
When a credit card company offers a promotional rate, and then shifts to the regular rate later, the payments you make on your balance are usually applied to purchases you made at the lower rate first, leaving the higher rate debt on your account for a longer period of time, allowing it to rack up more interest. This is common to accounts where the cardholder takes cash advances, which are generally assessed at a higher interest rate than regular purchases.
If all this wasn’t enough, many cards also charge many fees that cardholders may not discover until they’re billed for them. These fees can include annual fees, transaction fees, over-the-limit fees, balance transfer fees and application fees, among others.
Credit cardholders can dodge the hidden costs of having a credit card by carefully reading card agreements and choosing only credit cards that come with favorable terms. Another good idea is to pay off your account balance each month. Folks who need long-term credit may want to consider a home equity loan instead of charging items to credit card. Most home equity loans have far more attractive interest rates than credit cards do.
Overall, avoiding hidden costs related to credit cards is possible through diligence and an understanding of your credit card agreement. Be careful that you fully understand the terms of any credit card agreement you enter into, especially those advertised with “too good to be true” teaser rates. Also keep current on other accounts to avoid triggering universal default clauses.