Credit Card Fees Part Two
Third Party Late Payments and potential Credit Card Default
If you were over the limit on your card, or late in making monthly payments, you would expect to be in trouble with the credit card company. However, there is more to be concerned with than just paying on your credit card in a timely manner. Beware of third party default issues. A credit card company may penalize you for being late on some other (third party) payment! Here is an example of language lifted from an actual credit card agreement:
You default under this Agreement if you fail to pay, by its due date, the Minimum Amount Due listed on each billing statement; fail to make a payment to any other creditor when due;…
The beginning text in the clause is obvious, if you don’t pay this particular credit card statement on time, you will be punished. However the next clause is more subtle. I added the underlining and bold print for emphasis. This failure to pay another creditor issue is triggered if the other creditor (third party) notifies a credit agency of your delinquency, i.e. your Credit Report is updated.
For example, if you pay your cable bill (a third party) late, but always pay your credit card bill on time, the Credit Card Company may still hold you in default!
Annual fees
You should not be paying any annual credit card fees unless you have issues with your credit rating. If you do have such fees, call up your credit card company and see if you can get them dropped. In any event, you shouldn’t apply for any credit card that charges up front fees just to process your application.
Credit Card Payment Protection Plans
Beware of credit card companies trying to get you to sign up for a “payment protection plan”. These plans will typically pay or defer payments on your card account in the event you are laid off, fired, have an extended illness, etc. If you are in fact retired and your retirement funds are the main source of your income, then you should ask yourself what is the advantage for such a plan to me? These plans are not free with costs usually based upon your monthly charges. You still pay a fee even if you pay off your balance each month. Note, even if you do depend on a job for some of your critical income, you should still look long and hard at such a plan before signing up. Don’t be enticed just by some type of incentive check.
When such plans do kick-in, they usually will only make the minimum amount due, or just defer any payment at all. They may suspend interest charges, but again, if you are paying off your balances each month and are getting all or the majority of your income just by being alive at the beginning of the month, you have to ask yourself: “What’s the real benefit here?”
Raising the Rate!
Consider the following statement lifted verbatim from the back of a credit card offer:
You understand that the terms of your account, including the APRs, are subject to change. This means that the APRs for this offer are not guaranteed; APRs may change to higher APRs, fixed APRs may change to variable APRs, or variable APRs may change to fixed APRs. We reserve the right to change the terms (including the APRs) at any time for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account. Any changes will be in accordance with your Cardmember Agreement.
The bold print is as used in the actual statement. Hmm, “at any time for any reason”, would you sign a contract that contained such language?
Your interest rate on revolving balances (the amount remaining on your charge balance after you make a payment), can change any time at the sole discretion of the credit card company! Check your particular Card Agreement under the “Changing this Agreement” section. You may start out with a very low rate and be tempted to build up a large revolving balance. You may also think that your rate is safe so long as you don’t default under your Card Agreement, which generally means that you pay all of your creditors on time and don’t exceed any of your credit limits. However, this is not the case, your rate can rise at the sole discretion of the company no matter how good you’ve been. Also be aware that your credit line can also decrease which could impact future purchases that you may make. Typically such changes can be made via a special letter to you or simply by just appearing on your next statement. Always look at the credit line amount and applicable interest rate(s) on every statement to see if any changes have been made.
All of these cautions and admonitions add up to the importance of attaining the goal of using zero-balance credit cards for all of your charge transactions.
No good deed …
The following observations trigger remembrance of the cynical diatribe: “No good deed shall go unpunished!” As pointed out above, a credit card company can increase your interest rate for any reason. Some of these “any” reasons are listed below:
Interest rate increases on inactive credit cards
Before digging out an old credit card for some emergency use i.e. a situation in which you may end up carry a balance for a few months, you may want to check on the current interest rate. Just because you had a low rate when you initially got the card doesn't mean that it is still in effect. The low rate could have simply expired, or the company could have arbitrarily increased your rate.
Too much available credit
If your available credit increases on your credit report, a given credit card company can use this against you by raising your interest rate. They may view this increase in available credit as a potential threat in your ability to pay off your debts. Note this is a “potential threat” since; in fact you are still paying all of your current obligations on time! These available credit increases could be trigged by you getting an additional credit card.
Loan Inquiries
If you simply apply for an auto loan or a new mortgage, whether or not you actually follow through with the purchase can also trigger higher interest rates by some credit card companies.
Vanishing Grace Period
When looking at new credit card offers, check for the grace period - the amount of time you are allowed to pay off your total outstanding balance without being hit with a finance charge. Historically, almost all credit card companies offered some type of grace period although the length of such a period has been shrinking (35 days down to around 20 days).
Two-cycle billing credit cards
The two-cycle balance method is where the interest on your average daily balance is computed using both your purchases from that billing cycle and those from the month before. This is the case no matter how much you paid the month before - even if you paid of the prior balance entirely. Hence, it would take you two months instead of one to get back to a zero balance standing. This subtle nasty is triggered by going a month without paying off the entire balance in full. As long as you continue to pay off your credit card each and every month, you will not be affected by this method.
Stay tuned for more Budgeting Information!
If you were over the limit on your card, or late in making monthly payments, you would expect to be in trouble with the credit card company. However, there is more to be concerned with than just paying on your credit card in a timely manner. Beware of third party default issues. A credit card company may penalize you for being late on some other (third party) payment! Here is an example of language lifted from an actual credit card agreement:
You default under this Agreement if you fail to pay, by its due date, the Minimum Amount Due listed on each billing statement; fail to make a payment to any other creditor when due;…
The beginning text in the clause is obvious, if you don’t pay this particular credit card statement on time, you will be punished. However the next clause is more subtle. I added the underlining and bold print for emphasis. This failure to pay another creditor issue is triggered if the other creditor (third party) notifies a credit agency of your delinquency, i.e. your Credit Report is updated.
For example, if you pay your cable bill (a third party) late, but always pay your credit card bill on time, the Credit Card Company may still hold you in default!
Annual fees
You should not be paying any annual credit card fees unless you have issues with your credit rating. If you do have such fees, call up your credit card company and see if you can get them dropped. In any event, you shouldn’t apply for any credit card that charges up front fees just to process your application.
Credit Card Payment Protection Plans
Beware of credit card companies trying to get you to sign up for a “payment protection plan”. These plans will typically pay or defer payments on your card account in the event you are laid off, fired, have an extended illness, etc. If you are in fact retired and your retirement funds are the main source of your income, then you should ask yourself what is the advantage for such a plan to me? These plans are not free with costs usually based upon your monthly charges. You still pay a fee even if you pay off your balance each month. Note, even if you do depend on a job for some of your critical income, you should still look long and hard at such a plan before signing up. Don’t be enticed just by some type of incentive check.
When such plans do kick-in, they usually will only make the minimum amount due, or just defer any payment at all. They may suspend interest charges, but again, if you are paying off your balances each month and are getting all or the majority of your income just by being alive at the beginning of the month, you have to ask yourself: “What’s the real benefit here?”
Raising the Rate!
Consider the following statement lifted verbatim from the back of a credit card offer:
You understand that the terms of your account, including the APRs, are subject to change. This means that the APRs for this offer are not guaranteed; APRs may change to higher APRs, fixed APRs may change to variable APRs, or variable APRs may change to fixed APRs. We reserve the right to change the terms (including the APRs) at any time for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account. Any changes will be in accordance with your Cardmember Agreement.
The bold print is as used in the actual statement. Hmm, “at any time for any reason”, would you sign a contract that contained such language?
Your interest rate on revolving balances (the amount remaining on your charge balance after you make a payment), can change any time at the sole discretion of the credit card company! Check your particular Card Agreement under the “Changing this Agreement” section. You may start out with a very low rate and be tempted to build up a large revolving balance. You may also think that your rate is safe so long as you don’t default under your Card Agreement, which generally means that you pay all of your creditors on time and don’t exceed any of your credit limits. However, this is not the case, your rate can rise at the sole discretion of the company no matter how good you’ve been. Also be aware that your credit line can also decrease which could impact future purchases that you may make. Typically such changes can be made via a special letter to you or simply by just appearing on your next statement. Always look at the credit line amount and applicable interest rate(s) on every statement to see if any changes have been made.
All of these cautions and admonitions add up to the importance of attaining the goal of using zero-balance credit cards for all of your charge transactions.
No good deed …
The following observations trigger remembrance of the cynical diatribe: “No good deed shall go unpunished!” As pointed out above, a credit card company can increase your interest rate for any reason. Some of these “any” reasons are listed below:
Interest rate increases on inactive credit cards
Before digging out an old credit card for some emergency use i.e. a situation in which you may end up carry a balance for a few months, you may want to check on the current interest rate. Just because you had a low rate when you initially got the card doesn't mean that it is still in effect. The low rate could have simply expired, or the company could have arbitrarily increased your rate.
Too much available credit
If your available credit increases on your credit report, a given credit card company can use this against you by raising your interest rate. They may view this increase in available credit as a potential threat in your ability to pay off your debts. Note this is a “potential threat” since; in fact you are still paying all of your current obligations on time! These available credit increases could be trigged by you getting an additional credit card.
Loan Inquiries
If you simply apply for an auto loan or a new mortgage, whether or not you actually follow through with the purchase can also trigger higher interest rates by some credit card companies.
Vanishing Grace Period
When looking at new credit card offers, check for the grace period - the amount of time you are allowed to pay off your total outstanding balance without being hit with a finance charge. Historically, almost all credit card companies offered some type of grace period although the length of such a period has been shrinking (35 days down to around 20 days).
Two-cycle billing credit cards
The two-cycle balance method is where the interest on your average daily balance is computed using both your purchases from that billing cycle and those from the month before. This is the case no matter how much you paid the month before - even if you paid of the prior balance entirely. Hence, it would take you two months instead of one to get back to a zero balance standing. This subtle nasty is triggered by going a month without paying off the entire balance in full. As long as you continue to pay off your credit card each and every month, you will not be affected by this method.
Stay tuned for more Budgeting Information!
posted by Robert Ball at 8:45 PM
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