Credit cards are incredibly profitable. Capital One Financial Corp. generated a net revenue margin of 17.29% during the last three months of 2014, a staggering margin in a world of ultra-low interest rates. And Capital One is not alone: all major card issuers are able to generate outsized returns on the back of high interest rates and a complex web of fees and charges. Today we have a tale of two products. For savvy consumers, the rewards on credit cards have never been greater. But, for many people, credit cards remain an incredibly expensive way to borrow. The most profitable customer maxes out his credit card and pays only the minimum due. In addition, he will regularly pay a few days late and often goes over the credit limit. The least profitable customer has a lucrative rewards credit card and pays the balance in full and on time every month. In between these two extremes lies a minefield of fine print, ready to generate fee income or higher interest rates at a moments notice. Below are the four biggest traps, and tips on how to avoid them.
They Just Hiked My Interest Rate. Is That Legal?
Yes, credit card companies can still increase interest rates. The Credit CARD Act of 2009 made it impossible to increase the interest rate on existing balances, so long as you are making payments on time. However, credit card companies can still increase interest rates on our future purchases. And, if you miss two consecutive payments, they can increase the interest rate on you existing balance. Interest rates can be increased due to your behavior, or simple because the bank wants to make more money. Earlier this year, American Express announced that it would be increasing interest rates on more than one million customers, simple because their rates were below those charged by rival cards.
Even the smallest mistake can result in a significant rate increase.
Even with an excellent score, being one day late will increase your rate. In one such case, the rate was increased on future purchases to over 20%, in addition to the late fee of $35. To avoid interest charges, you should pay your balance in full and on time every month. Set up automatic payments to ensure that you are never late. The slightest mistake can be costly, and the punishment bears no relationship to the crime. Being 24 hours late should not result in a $35 late fee and doubling of the interest rate. But it does. If you need to borrow money, you should consider ditching credit cards completely and take out a personal loan. The Silicon Valley in funding a number of new online lenders whose entire model is to undercut credit cards dramatically on price for borrowers. And if you get hit with a late fee and interest rate hike, don’t be afraid to call your credit card company and complain. There is an excellent chance that they will reverse the charges and revert the rate.
I Have A 0% Promotional Rate. Why Did They Charge Me Interest?
People love free things. Every marketer and behavioral economist understands the power of free. When you hear the magic words “no money down and no interest,” you are much more likely to respond to the offer. However, not all 0% offers are created equally, and you have to beware. Some credit cards, especially those offered by a retailer when you are making a purchase, offer 0% on in-store purchases. However, if you do not pay the balance by the end of the promotional period, you will be charged interest retroactively and at thigh interest rates. For example, Apple offers 0% financing when you shop online. However, those credit cards charge interest retroactively. 0% financing offers can be a good deal. You need to read the terms carefully and understand if they waive the interest, or just defer the interest. Regardless, you should not make the purchase if you cannot afford to pay off the balance during the promotional period. Otherwise, it will end up costing you a whole lot more.
Foreign Transaction Fees
Credit cards can offer excellent value, convenience and security when traveling overseas. However, there is a big difference between credit cards that charge foreign exchange fees, and those that do not. Many banks still charge up to 3% on every purchase made outside of the United States. This can add up quickly. Fortunately, there are plenty of options out there to avoid the fee. Consider the Quicksilver card from Capital One. It charges no annual fee and you can earn 1.5% case back. Imagine you spend $3,000 while traveling abroad. On a typical card, you would earn no rewards and pay a 3% fee, which would be $90. With Quicksilver, you would pay no fee and earn $45. That is a material difference.
I Thought This Was A Business Credit Card?
Many small businesses open small business credit cards. This can be a great way to ensure that you keep track of your business expenses separately. It is also good for your credit score, because the balance on your small business card usually does not appear on your personal credit report. However, people often think that they are not personally liable for a small business credit card. If you apply for a small business card, you are usually taking personal liability for the balance. If you do not pay the balance on time, negative information can hit your personal credit report. And the lender can also proceed with legal action that can result in garnished wages. In most cases, there is no difference between a small business card and a personal card when it comes to the ultimately liability to pay. In addition, most of the protections from the CARD Act do not apply to small business cards. You could see your interest rate raised immediately on your existing balances, even if you are paying on time. You don’t need to avoid small business card cards, just understand the risk. And, if you are not the owner of the business, you should not apply for your own card. Rather, ask the business owner to add you as an authorized user to an existing account. That way the credit risk sits with the owner of the business, and not you.
Credit cards can be a great deal, so long as you pay on time and in full every month. But they can get very expensive if you forget these lessons.
We at Professional Credit Restoration LLC have extensive experience working with individuals and can help you in your planning. Contact either Jay or Patrick for more information or assistance.
Jay Gegenberg and Patrick Purcell