How to Decipher the Small Print in Credit Card Interest Promises
It’s bad enough to spend time reading all the small print that comes with your credit cards. It’s worse when you read it and still don’t get any information.
Card issuers are increasingly vague in their interest rate promises, charges Consumer Action, a group that monitors personal finance issues, in a survey released this week. First, issuers want to know all about you. Then they’ll tell you what rate you get.
Consider this disclosure from a Providian Bancorp (Concord, N.H.) brochure cited by the consumer group: “Annual Percentage Rate of between 5.9% variable and 15.9% variable, to be determined for each account. The APR will be established between 2.35% below and 7.65% above the prime rate and will not go below the established rate.”
Huh? Read between the lines and you’ll find that to get the best rates, you have to have a solid payment record.
If there are payment problems in your past, be prepared to pay higher rates.
The sliding-rate scale is just one of several ploys Consumer Action found in use by credit card issuers at a time when outstanding credit card debt is more than $200 billion and serious delinquencies are at a three-year high, according to Veribank, a research firm that measures the financial health of banks.
What are the other credit card hazards to avoid?
Punitive interest rates make timely payments not just sound credit policy, but essential: One bank recently sent out a pre-approved offer for a card with an annual percentage rate of 24.65%--or prime plus 16.4%!
But that rate was for the good customers. Accounts termed 30 days past due would be subject to a 28.65% penalty rate.
Norwest Bank, according to the survey, calls its 17.75% rate (far from a nationwide low) its “Prime Performance” rate. Accounts are reviewed every six months to see if they still qualify as “prime.” If not, their rate jumps to 19.8%.
Miss a monthly payment, and the rates increase by 6 more percentage points. Thus, you can be bumped from a 17.75% rate to a 25.8% rate if you have a few rocky months.
Consumer Action noted that issuers are also lowering the monthly minimum payments.
The typical minimum payment is now at 2% of the outstanding balance, down from 4% several years ago. At that rate, minimum payments barely cover interest charges, so only the most persistent cardholder will ever pay off their balances.
The lessons to be learned are tried and true. Avoid those rocky months and keep your credit card payments up, even if you have to do without cable TV or dinners out.
Then go further: Pay off your balances so you never have to worry what interest rate your card offers. Do this by devoting as much cash as possible to your card with the highest rate, until it’s paid off. Then focus those mega-payments on the next-highest card.
Promise yourself you’ll be a convenience user, paying off every month when you get your bill.
And get a no-fee card. The survey revealed that there are more cards without annual fees than ones with them.
So don’t pay that $20 to $40 charge. Next time it gets posted on your bill, either switch issuers or call yours and tell it to remove the annual fee if it wants to keep your business. Chances are it will.
Linda Stern is a freelance writer who covers personal finance issues for Reuters. She can be reached at 72160.1546@compuserve.com, or write to her in care of Reuters, Suite 410, 1333 H St. NW, Washington, DC 20005.
