Credit card companies employ a variety of tactics that can catch even the most vigilant consumers off guard. These sneaky practices can cost you more than you bargained for, from hidden fees to complex terms.
Deferred Interest
While 0% introductory APR offers are attractive, the catch lies in deferred interest terms. Suppose you don’t pay off the entire balance by the end of the promo period. In that case, you’ll owe interest on the full original amount. For example, a $2,000 balance with just $50 left unpaid can result in significant retroactive interest charges, often exceeding $400. The Consumer Financial Protection Bureau warns that deferred interest promotions can trap consumers in a cycle of debt if not carefully managed.
Automatic Credit Limit Increases
Credit card companies frequently raise your credit limit without a request, encouraging more spending. An automatic increase from $5,000 to $10,000 can increase balances and interest payments. These increases often result in an additional $1,330 in debt within a year. This tactic makes consumers feel wealthier, promoting spending beyond their means.
Advertising Debt as Flexibility
Credit card companies often market the ability to carry a balance as a form of financial flexibility. American Express, for example, offers a “Pay Over Time” feature, suggesting it as a benefit. In reality, this encourages revolving debt, which increases interest payments.
According to NerdWallet, the average amount of credit card debt among American households in December 2023 was approximately $21,367. About 60% of credit card users carry a balance month to month, leading to substantial interest charges over time.
Reduced or Eliminated Grace Periods
Some credit card issuers have shortened or completely removed grace periods, during which you can pay off your balance without incurring interest. Traditionally, a grace period might last 25-30 days, but some companies have reduced it to as little as 20 days or eliminated it altogether. This means that interest starts accruing immediately on new purchases, even if you pay your balance in full each month.
Double-Cycle Billing
Double-cycle billing calculates interest based on the average daily balance of the previous two billing cycles. You could be charged interest on a balance you’ve already paid off. Although the Credit CARD Act of 2009 restricted this practice, some variations still exist. This tactic can result in higher interest charges if you’ve had a high balance in the previous month. The Consumer Financial Protection Bureau notes that understanding your billing cycle can help avoid these extra costs.
High Fees for Exceeding Credit Limits
Many credit cards allow you to exceed your credit limit but charge substantial fees. These over-limit fees can be as high as $35 per transaction. Even though purchases over the limit can be processed, the fees associated can add up quickly, leading to unexpected expenses. Consumers can pay hundreds of dollars in over-limit fees annually if they are not careful.
Encouraging Minimum Payments
Credit card companies benefit when you make only the minimum payment. Lowering the minimum payment from 5% to 2% of your balance increases the time it takes to pay off debt and the amount of interest you accrue. Financial experts suggest this tactic can result in thousands of dollars in additional interest payments over time, creating a long-term debt burden. For example, a $5,000 balance with a 2% minimum payment can take over 20 years to pay off, with total interest payments exceeding the original balance.
Teaser Rates Skyrocket
Introductory teaser rates often lure consumers, but these rates can skyrocket after the promo period. For example, a card might offer a 0% APR for the first 12 months, but this rate can jump to as high as 24.99% afterward. Average credit card APRs can increase significantly post-intro period, leading to higher-than-expected monthly payments. This can result in consumers paying hundreds or even thousands more in interest over the life of the debt.
Hidden Fees in Fine Print
Credit card agreements often include hidden fees in the fine print, such as fees for balance transfers, foreign transactions, and even just maintaining the card. These fees can add up quickly and significantly increase the cost of credit cards. Many consumers are unaware of these fees until they are charged, underscoring the importance of reading the fine print. For instance, a balance transfer fee of 3% on a $5,000 transfer adds an extra $150 to the debt.
Balance Transfer Fees
While balance transfer offers can help consolidate debt, they often come with high fees, typically 3-5% of the transferred amount. For example, transferring $5,000 might incur a $150-$250 fee. These fees can negate the benefits of lower interest rates if not managed properly. Consumers must carefully calculate whether the savings from a lower interest rate outweigh the upfront costs of the transfer fees.
Penalty APRs for Late Payments
Missing a payment can trigger a penalty APR significantly higher than the standard rate. For example, a standard APR of 17% can jump to 29.99% as a penalty for late payments. Penalty APRs can apply to existing balances, dramatically increasing the debt cost. This can make paying off balances much more difficult and add thousands of dollars in extra interest payments over time.
Introductory Offers with Strings Attached
Introductory offers, such as bonus points or cash back, often come with strings attached, such as spending requirements or annual fees. You might not receive the advertised benefits if you don’t meet these requirements. Consumers should read the terms carefully to understand these offers’ true costs and benefits. For example, a card offering $200 cash back might require spending $3,000 in the first three months, leading to overspending and increased debt.
Foreign Transaction Fees
You might incur foreign transaction fees when you use your credit card abroad or make purchases from foreign merchants. These fees typically range from 2% to 3% of the purchase amount, adding a significant cost to your overseas spending. Frequent travelers can find these fees particularly burdensome, adding hundreds of dollars to their travel expenses annually.
Payment Allocation Methods
Credit card companies often allocate payments to lower-interest balances first, allowing higher-interest balances to accrue more interest. So, suppose you have a balance transfer at 0% APR and new purchases at 20% APR. In that case, your payments will typically go towards the balance transfer first. At the same time, the new purchases continue to accrue interest. This payment allocation method can increase the total interest paid over time, making it more difficult to pay down higher-interest debt.
Cash Advance Fees
Using your credit card for cash advances can incur steep fees and higher interest rates. Cash advance fees typically range from 3% to 5% of the amount withdrawn, and the interest rate on cash advances is often higher than the rate for regular purchases. Additionally, cash advances have no grace period, meaning interest starts accruing immediately. This can make cash advances a very costly way to access cash quickly.
