It's important to read the fine print with just about everything -- especially credit cards. Credit card companies use some pretty sneaky tactics to get you to sign up. They lure you with tempting offers that seem legit, but if you miss one iota of fine print, you're royally screwed. Here's what to watch out for, specifically, when you apply for a new credit card.
They Confuse You With 0% 'Deferred Interest'
The old "deferred interest" trick piggybacks on the draw of "0% introductory annual percentage rate" cards. With the latter, you pay zero in interest during a set amount of time, which is usually somewhere between 6 and 18 months. When your time runs out, the remaining balance is charged at the card's regular interest rate going forward. It's pretty cut and dry.
The deferred interest offer is almost the same thing, there's just one giant difference: if you don't pay your balance off after the introductory period, you're retroactively charged interest at the standard rate. Let's say you have a "0% for 6 months" deferred interest credit card. If you have even $1 unpaid after the six month period (or whatever the time frame is), you pay six months' worth of interest -- at your original balance.
You usually see deferred interest promos associated with store credit cards. All that said, deferred interest can work in your favour, too, you just have to be extremely responsible about paying your debt during that time frame. Most people aren't, which is why credit card companies offer this promotion in the first place.
Either way, when you open a new card and plan on carrying a balance with it, read the fine print about their interest terms. Do they waive the interest or just defer it? If they defer it and you carry a balance, you might be surprised at having to fork over interest later.
Making Your Travel Rewards Less Rewarding
We're generally fans of travel reward hacking, but these offers come with fine print that can catch you off guard.
Here are some other fine print issues to watch out for:
- Fees that don't count as rewards: Fuel surcharges, for example, often aren't included in rewards travel (and sometimes, the law actually prohibits it, so credit cards aren't entirely to blame). Still, fuel surcharges can add up to hundreds of dollars.
- Restrictions on companion tickets: To qualify, you sometimes have to buy a more expensive "unrestricted economy-class ticket," which means you're forced to spend more on an upgraded flight.
- No cancellations: Many times, it's in the fine print that if you cancel or try to rebook a flight, you lose your points altogether.
Travel rewards can indeed pay off, just make sure you know what you're getting into and understand what your miles will actually buy.
Hiking Up Your Interest Rate
Credit card companies often have complicated ways of charging you interest and each of them can have their own way of doing it. Two credit cards can have the same interest rate but you could end up paying more for one of them due to the way interest is calculated. According to consumer advocacy group CHOICE:
"The underlying issue is that most companies charge daily interest all the way back to the date of your original transactions. This means that for being one day late on a minimum payment, you could be charged retrospective daily interest on all transactions for up to 55 days, not on the amount you still owe.
For example, if your credit card bill is $2000 and you repay $1900 on time, most companies will charge interest on the full $2000 balance, backdated for up to 55 days, not the $100 in arrears."
Then there's the fact that card providers often cancel you interest-free period for any new purchases if you don't pay your bill on time. The interest-free period would only be reinstated after the owing balance is paid in full. There is only one way to avoid this: always pay your credit card bills on time.
Charging You Sneaky Hidden Fees
You probably know you'll be charged a late fee if you don't pay your credit card on time; that's a no-brainer. There are a lot of less obvious fees credit cards charge, though.
Balance transfer fees are pretty common, for example, and they usually go hand in hand with those "0% interest free period" promos. Usually, the interest rate applying to the balance transfer ranges from 0% to 5%, for a few months or until that balance is paid off. The issuer might not charge you interest for a set time frame if you transfer your balance, but they will likely still charge you a fee. One credit card fine print read: "A 1% Balance Transfer Handling Fee to a maximum of $50 applies to each balance transferred. If you're transferring a lot of debt, that can really add up."
Balance transfers are often used to lure customers into accepting bad deals. For example, a balance transfer with 0% interest sounds good, but the card could have poor value in terms of fees and standard interest rates.
Some cards also charge an annual fee, especially if it's a rewards credit card. Many times, the promotional offer will boast no annual fee, but that only applies for the first year, and after that, you'll start paying $1 or so just to keep the card open. Of course, some rewards credit cards make it worthwhile. Foreign transaction fees (or conversion fees) are also pretty common, and if you use your card overseas, those fees add up fast.
Charging You Residual Interest When You Close Your Account
Let's say you close your credit card, pay it off, but forget about that one tiny purchase that was still pending. This can be a financial nightmare, and there's a name for it: residual interest. CreditCards.com explains that the balance left behind can lead to hefty late fees and ongoing interest. The longer it takes you to realise you had an unpaid balance, the bigger of a monster it becomes. Here's what they suggest:
The best way to avoid residual interest/finance charges is to make sure the balance is paid in full," says American Express spokeswoman Mona Hamouly. "Do not stop making payments after the account is canceled. Payments must continue to be made by the payment due date each month until the balance is paid in full.
Also, to protect your credit score, be sure to request a letter from your card company confirming that the account was closed at your request, not theirs. Hamouly says AmEx mails confirmation letters at their card member's request within 10-12 days of the closure date.
Finally, they suggest you hold onto your last statement, too, so you have proof that you paid your balance in full.
Thanks to a little regulation, credit cards aren't nearly as sneaky as they used to be. Of course, they still try to lure you with enticing and often misleading offers; that's just what they do. Ultimately, it's up to you to protect yourself, and that means understanding the fine print. Knowing what to look out for, specifically, can help you do just that.