The credit card offers look practically irresistible. One promises a $100 bonus after your first purchase. Another touts a zero-percent interest on transferred balances. Airline miles move you? How about a free flight after the first swipe?
In case you haven't noticed yet, the credit freeze is over. These are real credit card offers - a few of the dozens that have been falling out of my mailbox lately. But like the mythical sirens that used to lure fishermen to watery graves, these credit card come-ons are dangerously deceptive.
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Why are you getting all these offers in the mail? Where are the rocky shoals hidden in the card offers? Here's what's in the fine print.
1. Balance transfer fees: Citibank is offering me "zero percent interest" for nearly a year, if I'll just transfer a balance to their card. "Think of the money-saving possibilities!" the advertisement proclaims. Or, maybe read the fine print to see how elusive the savings really are.
The fine print: Your transferred balance will be subject to a "balance transfer transaction fee" of 5% or $10 (whichever is greater). Does that mean you're paying a 5% APR on that first year balance? Nope. Because this credit card balance will decrease over time - and you're paying that 5% fee on the highest balance you'll have on the "zero-percent" deal - your APR is going to be considerably higher than 5%.
How much higher? That depends on how fast you repay. The faster you repay, the higher the relative rate. If you paid off the balance within three months, for example, the annualized rate would hover over 20%. But, repay too slowly and you're caught too. That's because any balance that's not repaid by the end of the free period gets hit with a 29.99% annual rate. Ouch.
"Credit card companies know that people generally will not pay off the balance in the free period," said Ben Woolsey, director of consumer research at CreditCards.com.
2. Reforms? What reforms? The Credit Card Accountability, Responsibility and Disclosure Act - better known as the CARD Act - eliminated many practices that consumers considered unfair and deceptive, such as retroactive rate hikes and arbitrary payment cut-offs that boost the chance you'd pay a late fee even when you pay on time. These reforms, which were phased in over the past year, have made most of the cards in your wallet safer to use. But business cards are exempt from the new rules, so lenders are sending solicitations for corporate cards to unwitting consumers.
Consider Chase's new "Ink" card that was either offered to me because I'm self-employed or because I have a mailing address. The pitch sounds great. The card will pay a $100 reward after the first purchase and up to 3% cash back on all eligible purchases. If you transfer a balance to the card, you get a zero-percent introductory rate for six months. (You would, however, pay a 3% transfer fee, which like the deal noted above, boosts the annual percentage rate on this deal above 6%.)
More importantly, because the CARD Act's protections do not extend to business cards, all the dirty tricks credit card companies were able to pull off before reform are completely legal with this card. Such as?
You remember that "zero-percent" (well, really 6%) deal for six months on transferred balances? If you use this card, you might as well kiss that relatively cheap financing goodbye. Unlike consumer cards, where you now can apply payments to the highest-cost balance first, this card says that Chase may "allocate your payments and credits in a way that is most favorable and convenient for us."
The company adds that this does mean that they'll force you to pay off the "promotional" balance before they'll apply payments to balances that are accumulating interest at a higher cost. Minimum rate on this variable-rate card is 13.24%, based on today's prime rate of 3.25%.
3. Foreign transaction fees: Almost all card companies have also imposed foreign transaction fees that apply whenever you use your card overseas or even by from a merchant that's headquartered outside of the U.S. The cost: 3% of the transaction. The only card company that doesn't currently impose these fees is Capital One, said Woolsey. That might be a card to get before your next European vacation.
4. Annual fees: The Southwest Airlines card, that offers me a free flight with the first swipe, is benign by comparison. Its main catch is a $59 annual fee. Although, if you transferred a balance to this card, you'd pay a 5% transfer fee too. Are the fees worth the potential rewards? Probably not. Why? The fees are a sure thing, the rewards aren't, as is better explained below.
5. Reward limits & rescissions: If you have rewards cards in your wallet you might have noticed that the formula for accumulating rewards has changed, said Bill Hardekopf, chief executive of LowCards.com. The new trend is to scale back programs that offer rewards on everything and replace them with "bonus" reward offers that give you up to 5% on designated categories of spending.
There are three catches with these bonus offers, Hardekopf said. First you've got to register every three months to get the bonuses. If you forget, no bonus. Secondly, most issuers put limits on the amount you can earn at the "bonus" rate. Discover's More card, for example, restricts your bonus to $15 a quarter, or $60 per year. Chase Freedom restricts you to $75 per quarter or $350 per year. Citi Platinum Select offers a maximum rebate of $300 annually.
But the biggest catch of all is that your rewards can be taken away. If you cancel the card (without collecting first); pay late, or otherwise run afoul of your card company - or if the company simply changes its mind - the rewards can be ripped away.
"Rewards are completely unregulated," said Woolsey. "[Card companies] can offer whatever they want and take it away whenever they want. That's an area that surprises people."
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