Stupid Credit Card Tricks: How Your Credit Card Company Lies to You
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trenttsd It didn't exactly make headlines outside of personal credit and finance websites, but Discover announced last week that it would pay out millions in refunds to customers who claim that they were deceived by telemarketers. The scandal in question involved customers signing up for payment protection and credit monitoring services they didn't actually want because the telemarketers spoke too quickly. The Consumer Financial Protection Bureau filed a lawsuit in tandem with the Federal Deposit Insurance Corporation. Discover settled the suit to the tune of $200 million in refunds paid to 3.5 million customers and $14 million in fines.
Whether or not Discover was willfully committing fraud is sort of beside the point. What is important is that there is a current of deceptive and quasi-legal system-gaming processes designed to maximize profits in the financial sector at the expense of consumers. This is just business as usual, and for every story about Discover getting caught red handed, there are probably hundreds of stories of companies not getting caught deceiving customers. While some deceptions might be more obvious than others, most fall under the rubric of "read the fine print closely." Of course, this only helps if you actually know what it is that you're looking for. I've put together this handy list that no one should apply for a credit card without having read. (See also: Why We Spend More When We Pay With Credit Cards)
Zero Percent APR
This is a favorite of credit card companies looking for new customers. It's especially attractive when it includes balance transfers, as it allows you to move your debt from a high-interest card to a no-interest card.
The Catch: The intro APR is legit, but it has an expiration date. Cinderella's carriage turns into a pumpkin when the ball is over, and you get hit with all the back interest charges that would have accrued over the course of a year. This can run into the hundreds or even thousands of dollars depending on how much debt you have on the card.
No Annual Fee
A lot of rewards cards require that you pay an annual fee for the privilege of taking advantage of their programs. In many cases, the annual fee can totally be worth it. If you're going to save $500 over the course of a year, it's not a bad idea to pay $100 up front. A lot of credit companies will waive these fees, especially for the first year. But unsurprisingly, there's a catch.
The Catch: This could be an entire article in and of itself. The biggest reason that no annual fee is a scam, though? A lot of times it comes with terms and conditions a mile long. Fail to meet these terms and conditions, and you're going to be paying that annual fee, despite the fact that you got a letter in mail saying that you wouldn't have to.
"Rewards"
It used to be that you used credit cards for emergencies or for purchases you couldn't afford at the time but couldn't get bank financing for. Nowadays, people pay for all kinds of things on their credit cards to accrue points. This is dangerous if you can't pay off the entire balance at the end of the month. However, even if you can do that, there might be a catch.
The Catch: A lot of times the rewards points aren't worth anything. What I mean by this is that if you never buy pumpkin seeds (for example), it doesn't matter how many rewards points you have if they can only be used for pumpkin seeds. Always read what you can purchase with your rewards points before you start racking them up. Further, if you're using rewards points for travel, look into the blackout dates and restrictions before you get too excited. Finally, note that many credit card rewards programs have expiration dates.
Cash Back
People hate paying bills, and credit card bills are probably the least favorite bill going. So what better way to entice customers to use your credit cards than by offering them cash back? But you're going to be totally unsurprised that there's a lot more smoke than fire here.
The Catch: The devil is, of course, in the details. You might only get cash back on a certain amount. Or the percentage of cash back that you can get fluctuates. Or you might be required to spend a certain amount and keep a balance for a certain period of time to be able to collect on the cash back. No matter what the case is, remember that credit card companies are in the business of making money off of the money that you spend. They're not just going to give you cash because they think you're a nice guy.
Repayment Hierarchies
You have a high-interest card carrying a high balance. In an attempt to make your finances healthier, you get a zero-interest credit card and transfer the balance over. You have a plan to pay down the debt within a year to ensure that you aren't going to incur the massive interest rates and fees that come along with not paying off the card within the year. But the unexpected happens, and you need to make new charges on the card.
The Catch: Your plan to pay down your debt has just been thrown into total disarray, thanks to a little something known as repayment hierarchies. Put simply, this means that you pay down different debts in different ways. If your credit card has different interest rates for balance transfers and purchases, guess which one you pay down first? The one with the lower interest rate. This is so your credit card company can maximize the amount of money it is getting from you via interest.
Caveat Emptor
There are few places where caveat emptor ("let the buyer beware") are more applicable than with credit cards. Read the fine print, but also understand the fine print and its long-term consequences. This will keep you from turning advantage to adversity and help you to get out of debt, not accrue more.
Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.
Rule #1 on my financial religion: Never Pay Interest on Credit Card, Always pay off the full amount. Personally, I never carry any positive balance for more than one week, and I aim at paying off everything on a weekly basis.
Great article for revealing the secrets of the loan sharks! It's a fine line between saving money on credit cards and getting yourself into unneeded debt. Debt is slavery, and the loan sharks have many tricks up their sleeves. The only proper way to use credit cards is to pay off the balance in full as soon as possible.
Are you sure about the repayment heirarchies? I thought the Card Act forbid card companies from applying your payments to the lowest-interest debt first.
This article is misleading.
Balance transfer erms are very clear when you apply. No one forces you, one signs up to buy some time. If do not repay you have to pay interest or transfer again.
Rewards: rewards are clearly ,mentioned in all major cards, I have not such any lying anywhere.
Cash back: limit are known at application, and they are generally fare on major cards, if you don't like it you are free to not apply and use check or debit card and get nothing in return.
Repayment Hierarchies: this is taken of as of August 2010 after card act.
I agree with Atul. The article starts with the premise that credit card companies lie. Words and phrases such as "gaming process", "caught red handed", "scam" and others suggest that the card companies are out to deceive people.
I have several no annual fee credit cards that I held and used for decades. I just cashed in rewards points and used them for travel. The process was painless.
Most banks work hard to treat customers fairly.