How to Separate Credit Card Fact From Fiction

Starting this fall, you should find it somewhat easier to shop and compare credit card offerings, thanks to new federal disclosure rules. But don’t think shopping will become a piece of cake. You still will need to sort fact from fiction, as card issuers will continue to hype their cards to make them sound better than they really are.

The Federal Fair Credit and Charge Card Disclosure Act, passed last year by Congress and set to take effect Sept. 1, requires card issuers to state certain key information clearly and conspicuously in a table on all applications and solicitations.

Included must be information on the annual fee, grace period for paying balances before interest charges accrue, annual percentage rate (including whether a variable rate applies) and the method used to calculate balances. Issuers also must include information on “hidden” fees, such as late payment and cash advance charges.

For years, such information has often been buried in the fine print--if mentioned at all.

But because credit cards have been so profitable to issuers, you should expect to continue to receive numerous solicitations to sign up for yet another piece of plastic. Such solicitations will also continue to hawk gimmicks such as higher credit limits or no annual fees.

Problem is, some of the hype will continue to be misleading--even with the new federal disclosure rules, contends Robert B. McKinley, publisher and editor of Ram Research & Publishing, a Frederick, Md., credit card research firm.

“Some cards that seem to be bargains are not,” he says.

McKinley details several common card marketing ploys and how to see through them:

- Gimmick: “Free” cards with no annual fee.

Warning: Many issuers waive the annual fee only for the first year. Or they may levy transaction charges or monthly fees as high as $1.50. Or they may charge sky-high interest rates that may be assessed from the date each transaction is posted--meaning you have no grace period before interest is charged.

“In other words, as long as you do not use these cards, they are free,” McKinley says. “Otherwise, they are anything but free.”

- Gimmick: Fifty interest-free days.

Warning: Almost any consumer can try to take advantage of 50-day grace periods, common to most credit cards, but only by timing purchases and payments perfectly.

Such grace periods can be created by stringing together two standard 25-day grace periods, McKinley says. First, you must charge an item on the first day of a new monthly billing cycle so that it will be posted to your bill in the next billing period in 25 days. Then you’ll have 25 more days to pay for the purchase before incurring interest charges. Hardly worth the effort.

- Gimmick: Skip a payment.

Warning: You’ll still pay interest. Some banks allow you to skip payments for as many as four months, without late-payment penalties. But interest charges are likely to continue to accumulate.

- Gimmick: Lowest rates in the nation.

Warning: High annual fees or other charges may offset the low rate. One Arkansas savings institution, for example, brags that its rate, recently just under 12%, is the nation’s lowest. That’s true. Problem is, its annual fee of $35 is twice the national average and it allows no grace period, McKinley says. Also, few borrowers can qualify for the card.

- Gimmick: Convenient cash advances.

Warning: Issuers often slap high fees or charge high rates on cash advances. That’s why they encourage borrowers to obtain cash advances with their cards. Special cash advance fees can run as high as 5% per transaction, on top of regular interest charges. On an annualized basis, those additional charges can total well over 50%, McKinley says.

- Gimmick: Lower rates for customers with savings or other accounts.

Warning: While card interest rates may be lower if you also maintain checking and savings accounts at the same institution, fees on the checking and savings accounts may be higher.

- Gimmick: Rebates or special discounts on items purchased with the card.

Warning: You may not save anything. Some offerings of “Bonus Dollars” or other discounts require you to buy overpriced items, McKinley says. Make sure the items offered for sale are really bargains. And make sure the fees or interest rates on the card are not higher than average, thus wiping out any apparent discounts on purchases.

- Gimmick: Extra benefits such as travel accident insurance.

Warning: Don’t expect to get something for nothing. The benefits, such as travel accident insurance, lost luggage insurance, car rental discounts and travel rebates, sound tempting. But you may pay a higher annual fee or interest rate for such frills.

How should you shop for a card? Focus on the three basic elements of all good card deals: low interest rates, low annual fees and grace periods, McKinley says.

A good deal is considered to be a card with an interest rate below 16.5%, annual fee below $15 and grace period of at least 25 days, he says.