What Credit Card Companies Don’t Want You To Know

credit card practices

Common Credit Card Practices You May Not Know.

The world of credit changes often and without notice. So unless you have made it your business to know all the twists and turns of the credit card industry you may be surprised to find out some of their common practices.

These practices can cost you money, affect your credit score and become a headache if they catch you off guard. Knowledge is power! So here are some of the things you need to know about credit card companies.credit card

1. There is no federal law that sets a maximum APR

While your credit card may have a maximum interest rate stated in its “terms and conditions,” there is no legal cap. Many states have usury laws that regulate interest rates on all loans, but they only apply to banks based in that state. That’s why the major credit card companies are incorporated in Delaware or North Dakota, where there are no usury laws. The average interest rate was 14.9% in April 2015, but penalty interest rates typically hover around 30%, and one subprime credit card issuer staunchly defended its 79.9% APR credit card in 2009.

2. Fixed interest rates are never really fixed

Even if you always pay on time, the “fixed interest rate” on your credit card can be raised basically any time the credit card company feels like it, according to Forbes. Issuers just have to give the customer 15 days notice of the rate change. Always read any correspondence from the credit card company to avoid a nasty surprise.

3. If you are late on one card payment, the APR on all your credit cards could be raised

After just one late payment, you could end up with a penalty interest rate across all of your credit cards, even if you have always paid the other card balances on time. Monitor all of your accounts to ensure you know your APR for each card, and always make payments on time from this point forward. You will likely be stuck with the higher APR for a while, but according to the CARD Act, credit card issuers must reconsider a cardholder’s penalty interest rates after six months.

4. Your APR can be raised if you are late on any bill, not just your credit card bill

Many credit card agreements now include a clause saying the company can raise your APR if you are late on any bill, not just a credit card bill. The credit card company monitors your credit report on a regular basis to look for any change that could lower your credit score and allow the company to raise your interest rate. This is called “universal default” pricing, and it can be triggered by several activities including securing a new mortgage or car loan or being late (even once) on a credit card, mortgage, utility, or car payment.
– via The Cheat Sheet

How Credit Card Companies Target The Uninformed

Every credit card offer sounds so great! Lots of promises, great rewards, it all sounds like you can get free money! Not hardly.

The truth hits home when you carry a balance and just pay the minimum payment, or worse yet, something happens and you are late with a payment! Things aren’t so great anymore.

We all know some credit card deals are worse than others, so why do people take those bad deals. Here’s a look at the way that credit card companies keep people using credit and paying high fees.

Basically, that means there are a lot of people out there who buy things with credit cards, and who then  either can’t or won’t pay for those things at the end of the month, and who instead decide to make payments on the debt each month. At 12 percent or 14 percent interest that’s a very expensive way to live. But some people do it.

Why? Well, you won’t find much of an explanation in the  school of economics that assumes everyone is rational and  where people only borrow when it makes economic sense to do so. But behavioral finance is replete with examples of short-sightedness, lack of self-control and over-optimism about one’s future. These behavioral biases might not afflict everyone, but lots of people are certainly vulnerable — especially the poor and less educated.

Credit-card companies need people to spend more than they can afford, but not so much that they default on their payments. So they could benefit from targeting individuals who are more likely to have cognitive failings. This is the dark side of behavioral finance.

Some new research by economists Antoinette Schoar of the Massachusetts Institute of Technology and Hong Ru of Nanyang Technological University claims to find exactly such a result. The authors use data from a private company that tracks credit-card offers. They find that less educated consumers — who are likely to be less financially sophisticated — are more frequently given offers that include back-loaded costs. Those are plans that start with low rates, but increase later, with extra-high over-limit and late-payment fees. In other words, those are likely to be the borrowers who make bad financial decisions — racking up debt and eventually paying much more in interest. Meanwhile, more educated households tend not to be offered these plans.
– via Bloomberg View

Do you know, really know what the rules are for your credit cards?

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