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Credit Card Tricks and Traps

October 2008

Credit Cards

Banks and credit card issuers are facing lots of bad loans and defaults. With profits squeezed they will inevitably turn to you, their faithful customer, to make a little extra money. How? By raising fees and sneaking extra charges past you if you are unwary. Here are some favorite tricks that credit card companies use to fatten up in lean times at your expense.

Late Fees. Penalties for late payments are rising. You need to be very vigilant to avoid late payment penalties. Deadlines are rigid, often specified right down to the minute and hour on your payment due date. Credit card companies typically mail billing statements out two weeks before the statement is due, which means you need to send in your payment very quickly, especially if you bank by snail mail. Even if you bank online, you need to remember that it takes time for your bank to process your payment request. One great way to minimize late fees is to sign up for online services on your credit card’s web site. Not only can you authorize money transfers directly out of your bank account to your credit card company (great if you’re running late), but you can also often sign up for email reminders that your payment is due soon or that your balance has reached a particular level. If you find that you just put your billing statements aside and forget about them, it may be worth your while to automate your payments—just watch out for those overdraft fees at your bank if you carry too slim a balance.

Penalty Rates. Max out your card or run late just once and many card issuers will switch you immediately to a default or special delinquency penalty rate. Instead of paying that nice low interest rate you signed up for, you get slapped with substantially higher monthly interest rates.

Grace Period. Watch out for amazing shrinking grace periods in tough times. A grace period lets you avoid finance charges if you pay your balance in full before the date it is due. Knowing whether a card gives you a grace period is important if you plan to pay your account in full each month; since without a grace period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account.

Balance Transfer Fees. If you carry a balance on your cards, you may be tempted by low introductory interest rate offers to move your balance from one card to another. Be wary. It used to be that balance-transfer fees were capped at $75 or so, now credit card companies are getting rid of caps on balance transfer fees or increasing the fees. Transfer fees can run 2% to 3% of the balance, plus rates often jump very dramatically after only a few months. Another pitfall with balance transfer fees is that you'll generally only get that introductory rate on the amount you transfer—new charges incur interest at the higher rate.

Transaction Fees. Some issuers charge a fee if you use your card to get a cash advance or make a late payment, or if you exceed your credit limit. If you use an ATM not owned by your bank, watch out for double ATM fees levied by from your bank, plus the ATM owner. Withdrawals from overseas ATMs often incur hefty international transaction fees. If you plan a long stay overseas, it pays to shop around for cards that don’t charge international transaction fees, or consider opening an account with a local bank linked electronically to your home bank if you are spending an extended time in another country. A particularly sneaky charge is the PIN-based debit fee. If you swipe your card at a retail checkout and choose debit rather than credit, some bank card issuers will levy charges as high as $1.50 per transaction.

Membership Fees. Many credit cards charge membership and/or participation fees. These fees may appear monthly, periodically, or as one-time charges, and can range from a few dollars to as much as $150. With plenty of fee-free cards out there, it’s hard to make a case for the dubious “status” of a gold or silver piece of plastic.

What Rewards? Unless you are a real road warrior, travel reward cards are often a poor bargain. Airlines, faced with huge liabilities on their balance sheets for unspent miles, hit on the expiring miles gambit to make unclaimed miles disappear. Plus, with blackout days and a dwindling number of seats allocated to frequent flyers claiming miles, it has gotten much harder to use your rewards. Credit card issuers and airlines often levy transaction charges when you redeem your “rewards,” and reward cards often carry a high annual membership fee. One exception: cash back cards can be worthwhile if you run most of your expenses through a single credit card and pay the balance in full each month.

Inactive card fees. This is my personal favorite. Stop using a credit card or use the card only a few times per year and you may be liable for an inactivity charge. It gets even worse if you ignore the bills the “inactive” card issuer sends, thinking they are marketing letters. Then you’ll get late fees, minimum finance charges and interest payments layered on top of the inactive card fees. The best prevention—resist the urge to sign up for every credit card “special offer.”

Loss Protection Insurance. Save your money. This is insurance you don’t need. According to the Federal Trade Commission, your liability for unauthorized charges is limited to $50, and most issuers will not even hold you liable for this amount if you are prompt in alerting them to fraudulent activity. The best protection against credit card fraud is to check your statement item by item as soon as the bill arrives. If you use Quicken or online access to your credit card account, weekly monitoring of your credit card charges can also help you spot strange activity fast. If you didn’t authorize a charge, or if you don’t recognize a charge, call your credit card company immediately. Follow your credit card issuer’s procedures for disputing charges you haven’t authorized and discuss whether it makes sense to change your card number with your credit issuer’s fraud experts.

The best defense is a good offense. Don’t hesitate to call your credit card company for a little chat to find out which charges might apply to you and how best to avoid them.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Past results are not indicative of future performance. Outside sources used in this article are believed but not guaranteed to be accurate. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve.