Beware Credit Card Users – It’s All In The Fine Print

Not reading the fine print of the credit cards you use is a sure invitation to have your blood sucked. Nowadays millions of people are using credit cards to make purchases. If you pay for anything with a credit card, then beware that the 9% interest rate you thought you were locked into could actually go as high as 30%, and you might not know it until you get slapped with the bill-retroactively.

“Penalty interest rate” and “universal default” are provisions included by banks in their credit card offers which they claim are necessary to offset risks. These provisions are legal as long as issuers can say they warned you. The rates and fees in these provisions are all out of proportion to the risks. Issuers have used better ways in the past to protect themselves. For example, they used to cut customers off after they hit their credit limits, which I think was a good thing for the user.

Now they let you keep spending so they can charge you over-limit fees (as much as $29 per billing period) and permanently higher rates. This can be devastating for the budget of many users. So be careful–always read and understand the fine print before it is too late.

Never pay your credit card bills late even by an hour as your interest rate can be increased permanently. In May 2004, according to the testimony by credit card issuers before the Senate banking committee, $14.8 billion (or 11% of their revenue) were collected on penalty rates –which averaged about 24% this year according to the Consumer Action. To make things worse for the user the new rates can be applied retroactively to purchases already made. Companies usually specify an exact time by which payments must be received. If they don’t specify it, you should contact them to find out.

Be aware that even if your mortgage or other payment is late (under the “universal default”) credit card issuers can raise your rates because you are now classified as high risk. One bank was found charging a 35% universal default rate by Consumer Action.

Having too many inquiries into your credit history can also trigger universal default rate and you may be charged a fee thus lowering your credit rating.

Credit card issuers made $7.7 billion on penalty fees in 2003. There is no legal cap on banks’ interest rates. And the Supreme Court in 1996 prevented states from setting limits on late fees.

Legislations are underway to ban the “universal default” interest rates based on alleged missteps with another issuer, ensure that penalty fees match issuers’ costs and ban over-limit fees. Whether this actually happens or not time will tell. But until then you have to be extra careful and read every fine print because it is all in there.