The Dirty Secrets of Credit Cards
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The average American household carries almost $16,000 in credit card debt (only counting indebted households), according to a recent study by Nerdwallet. If that’s not bad enough, the credit card companies are involved in what can only be described as a conspiracy to keep Americans in debt, permanently.
I watched an incredible PBS documentary online last night called “Secret History Of Credit Cards”. You can watch the 5-part eye-opener here at your leisure. But if you don’t have an hour to spare, here are some of the biggest dirty secrets for you. You may want to sit down for these.
1. Minimum Payments Are Ripoffs
The minimum payments banks require on your monthly bill are not regulated. Banks are required to set minimum payments that will allow borrowers to pay off the debt in a "reasonable" amount of time, but after that, it's up to the banks to calculate their own minimums. The result is often minimums that shave only a few percentage points off the principal, which extends the time borrowers pay interest. Here's an example. Let's say you owe a modest $2000 on a card with a decent interest rate of 13% and a minimum payment based on paying 2% of the principal. Your minimum payment would be a mere $40, but it would take you almost 15 years to pay off the balance! Before that debt is retired, you will have paid the bank $1813 in interest. Cha-ching.
2. A Late Payment Can Skyrocket Your APR
Before the CARD Act became law this was really bad, and thankfully, that law has mostly eliminated the practice of "Universal Default," which allowed banks to hit you with a skyhigh APR if you were late paying any creditor, not just your credit card company. And while things are definitely better, the banks can still bump your APR to 25% or 30% or even higher if you make even one late payment. This "Penalty APR" will be noted in your card agreement and will be applied to all new purchases. If your payment is really late, 60 days or more, the bank can apply the penalty APR to your existing balances, too. (Ouch!) Card issuers are required to review any account that has been slapped with a Penalty APR after six months of on time payments, but that's no guarantee the Penalty APR will be reduced.
3. Late Payments Can Cost You More Than a Late Fee
Have you seen the credit card commercials that claim cardholders won't be charged a fee if they make a late payment, especially if they've been good customers? First of all, every cardholder should know that it's easy to get a late fee waived: Just call and ask. Every cardholder should also know that a late pay can hurt in other ways, too. For one, if you've been avoiding interest charges by paying your balance in full each month, a late payment will immediately incur an interest charge on your balance, and it may take two billing cycles for the grace period to get put back in place. Depending on how late you are, the bank may report your account to the credit bureaus as a late pay, dinging your credit score. If the account has been open for a year or more, the bank could apply the Penalty APR to future purchases. Finally, every day you're late is another day you're paying interest on that debt.
4. There Is No Federal Limit on Interest Rates
Don’t you find it odd that in a time of very low interest on anything from car loans to mortgages, credit card companies can hand out APRs that embarrass loan sharks? Well, it’s not unusual to see 34.99% APRs, especially as a penalty rate, and the reason is simple. Most credit card companies reside in states like South Dakota or Delaware, states that have very weak or even no “usury laws.” So, there’s no cap on interest. By law, there’s nothing to stop them charging whatever interest they want. Here’s a map that links to the locations of top 10 credit card issuers.
5. Grace Periods Are Getting Shorter... or Being Eliminated
There's nothing in the law that requires banks to offer a "grace period" on purchases before charging interest. It's a holdover from the beginnings of the industry. Still, most cards continue to offer them as a perk, and it really is a good deal for consumers, as long as they pay their balances in full and on time. Slip up and leave a small balance for next month, however, and you'll lose your grace period and start incurring interest from the moment you make a purchase. Worse, it can take two months of paying balances in full to reinstate the grace period, if it can be reinstated at all. Check your card agreement and pay off those balances!
6. Cash Advances Hit You Twice in the Wallet
First, as I’m sure you know, you’ll get a different, higher APR applied to your cash advances. But you also get hit with a transaction charge, around 2.5%. Even credit cards that confidently announce “no finance charges” can still bill you for these transaction charges.
7. Good Payers Are Called "Deadbeats"!
Deadbeat – it’s what credit card companies call those folks who are responsible and pay off the balance each month. They don’t like those people, not one bit. That’s because they make little to no money off of them. No, credit card companies like you to carry a nice hefty balance and pay only the minimum each month. If you’re one of those people, known as ‘revolvers’, you’re part of the crowd that contributes roughly 90% of the credit card company’s income. What a crazy upside-down world credit is.
8. You Can Demand, and Get, a Better Deal
APR too high? Hate the annual fee? Want a longer grace period? It turns out your credit card company may just have to do your bidding. See, the fees they charge are not considered a necessary cost of doing business, so you can request, firmly, that they be reduced or eliminated. Now, imagine what would happen if we all did that? No wonder they want that one kept secret. And remember, if all else fails, find a lower cost APR card and transfer your balance. You have at least that going for you.
That’s the scoop, folks. If you happen to be in spiraling credit card debt, there are places you can go to for help. PBS has a great list of resources right here. And from now on, I hope you all look a whole lot closer at that handy piece of plastic in your wallet. It’s far more ominous than it first looks. Pleasant dreams everyone.