The federal government has taken steps to protect consumers from the credit card industry’s worst abuses. But several common practices still vex credit cardholders.
Example: Capital One recently was ordered to refund $150 million to 2 million customers and pay $60 million in penalties because of “deceptive marketing tactics” used to convince consumers to buy payment-protection plans. Discover Financial Services recently said that it might face similar actions by the newly created Consumer Financial Protection Bureau.
How to protect yourself from tricks used by the credit card industry…
Don’t fall for claims that you need a payment-protection plan. Payment- protection plans, also known as payment insurance, are supposed to pay or suspend cardholders’ minimum payments should those cardholders become disabled or unemployed.
The trap: Payment-protection plans are overpriced and so riddled with loopholes that they usually provide little or no assistance, even when cardholders do become disabled or unemployed.
The marketing tactics that are used to sell these plans sometimes are quite questionable, as evidenced by the action against Capital One. Consumers have been told that signing up will help their credit scores…that the program is required…or that it is free—none of which is true. Some issuers, including Bank of America, have stopped offering payment-protection plans—but others still are pushing them.
What to do: Never purchase payment protection. Take the money you would have spent for it each month, and use that money to pay down your credit card balances instead.
Don’t assume that a weekend gives you an extra day to make a payment. Before the Credit Card Act of 2009, consumers who delayed their payments until the last minute often were charged late-payment penalties when their payment due dates fell on weekends or holidays. That’s because banks weren’t open to accept payments on those deadline days. Now, thanks to the Credit Card Act, if the card issuer is closed on the payment due date, cardholders can pay without penalty on the next open day.
The trap: Some card issuers have responded by keeping an office open to process payments on weekends and holidays. Cardholders might erroneously assume that their banks are closed, incurring an avoidable penalty.
What to do: If you realize that your payment is due immediately, pay on that day online or by phone if possible, even if it’s a weekend or holiday. Better yet, pay credit card bills well in advance of their due dates.
Don’t assume that fees on subprime cards must be reasonable. Credit cards available to consumers with low credit scores often have steep annual fees and low credit limits. That’s understandable, but the Credit Card Act attempted to put a reasonable ceiling on these charges, capping total annual fees at 25% of a card’s available credit line in the first year that the account is open.
The trap: First Premier Bank successfully argued that the 25% cap applies only to annual fees charged during the first year after an account is up and running—not to setup fees imposed before the account officially is opened. Thus card issuers still can charge huge fees simply by charging many of them at the outset.
What to do: If you have poor credit, do not assume that the Credit Card Act protects you from excessive credit card fees. You still must carefully compare the rates and fees of credit cards available to you—including initial setup fees—before signing up.
Don’t miss warnings of rate increases. According to the Credit Card Act, issuers must notify cardholders at least 45 days in advance of any interest rate increases, unless you have a variable interest rate linked to an index or an introductory rate.
The trap: Few consumers read all the paperwork that comes with their credit card statements, and fewer still read paperwork sent separately—this often is mistaken for advertising.
What to do: Open all mailings from your credit card issuers to make sure that they are not alerting you to rate increases. If your rate is increased to a level that you consider unacceptable, contact the issuer to check whether you can get the new rate reduced. If you cannot and want to avoid the higher rate, call to cancel the card or just stop using it. To be safe, take the card out of your wallet so that you don’t use it accidentally. Also, transfer any automatic payments made with this card to other cards. Using the card again constitutes acceptance of the higher rate.
Realize that “0% interest on balance transfers” does not mean “zero cost.” Offers of 0% interest on transfers abound in the wake of the Credit Card Act.
The trap: Expect to be charged a steep fee for the right to make these “no-interest” balance transfers. Balance transfer fees of 3% to 5% of the amount transferred are nothing new, but in years past, they tended to be capped at less than $100. These days, there usually is no cap on this fee at all, a subtle but expensive difference.
What’s more, these 0% offers rarely last long. Fail to pay off your debt before this introductory rate expires and your interest rate might leap to a fairly steep rate. Keep in mind that issuers have ways of tempting cardholders not to pay off their balances in time.
Example: Many 0% balance transfer cards now feature attractive rewards programs to encourage cardholders to use these cards for new purchases, too. That way their balances go up, not down, during the 0% window.
Also, people who apply for 0% balance transfers actually might be approved for less appealing terms—something they might not realize until after the balance has been transferred if they fail to read approval notices carefully.
What to do: Add up the fees before you jump at a 0% balance-transfer offer. Make a realistic assessment of your ability to pay off the debt before the 0% interest period expires, and consider the interest rate that will apply once the 0% period ends. Avoid using this card for new purchases if doing so will inhibit your ability to pay off the debt before the 0% period ends.
Don’t lose finance-charge rebates or rewards points by paying late. Before the Credit Card Act, issuers often dramatically increased interest rates if cardholders were even a single day late with a payment. The Card Act now prevents them from increasing rates on existing balances unless cardholders are at least 60 days late with payments. But a case can be made that Citibank has found a loophole to this rule—one that other banks might copy. Citibank offers special interest rate reductions to cardholders who make on-time payments on their Citi Forward or Citi Forward for College Students cards.
The trap: The Credit Card Act’s rule about rate increases triggered by late payments doesn’t apply to these special rate reductions. They could be revoked if you’re a single day late with a payment, effectively increasing your rate.
What to do: Be very cautious about running a balance on a card that provides finance-charge rebates. Your effective rates could be upped at your first misstep.
Don’t accidentally pay just the minimum required. Paying credit card bills online can be very convenient, but if you don’t pay close attention, you could make a costly mistake.
The trap: Some card issuer Web sites automatically fill in the minimum required amount in the payment box of the online form rather than the full balance. Cardholders who intend to pay the full balance might not notice this and end up paying interest on an unpaid balance unintentionally.
What to do: Double-check that you are paying the amount that you intend to pay.
