Some of the worst offenses: Huge fees that exceed card issuers' costs and risks. Interest rates that aren't disclosed to card applicants. Rates that get jacked up even if you pay just hours late. Below we list some practices that may at first catch you off guard, but upon understanding the rationale behind them you can grow in acceptance and others that are just down right egregious.
We call them the Well, OK. and the No way! practices, respectively below.
Well, OK. Charging different customers different interest rates or offering different terms, based on their credit histories.
No way! Not telling consumers upfront what interest rates or terms they'll get.
If you have a good credit history, you should get a good rate, not one that's been inflated to cover the risks of others who haven't been as responsible. But no one should have to gamble when applying for a card. Though some issuers usually tell you in advance what rate you'll get if approved, others typically only offer a range of possible rates. You might get a rate that's in the single digits or one that's over 20%.
What to do. Don't hang on to a card you don't want. Though closing cards can never help your FICO credit scores and may hurt them, the damage isn't likely to be as serious with a newly issued card as it might be with one you've held for many years. But you shouldn't apply willy-nilly for cards, either, because each application can potentially ding your scores. Also, some lenders may look askance at a borrower who rapidly opens and closes accounts, thinking such customers will be unprofitable. If you're looking for a lower rate, first contact your existing issuer and negotiate for one. If you plan to apply for a new card, know your FICO scores so you have an idea of what interest rates you're likely to get. Consumers with FICO scores above 720 get the best credit card rates and terms.
Well, OK. Credit card companies reporting your missteps to credit bureaus.
No way! Credit Card companies reporting half-truths.
The credit reporting system in the United States has some serious flaws. Creditors wield too much power, and it's too hard for consumers to fix mistakes. However, the system has succeeded in making credit more widely available, which is a boon to savvy consumers. If you get credit and use it responsibly, you can build a credit history that allows you to get the loans you need to buy a home, build a business or accomplish other goals.
Problematic are the lenders that deliberately make their customers look like worse credit risks than they are. Some of the worst offenders are issuers that don't report their customers' on-time payment records at all. Next on the list are those that don't report their customers' credit limits. When a lender doesn't report a customer's credit limit, the bureaus typically use the "highest balance charged" as a proxy for the limit. The problem comes when borrowers charge about the same amount each month. It makes sense not to report a credit limit when a card has no preset spending limit, but consumers that have those types of cards they tend to have pretty good credit to begin with, so the lack of an accurate credit limit on one account isn't likely to hurt much. The people who really get crunched are the people with short or troubled credit histories who are trying to do things right but are unknowingly being penalized by their credit issuers' practices.
What to do. If your issuer isn't properly listing your credit limits, you can request that they do so. If your issuer is won't budge you're out of luck. You can either charge up a big balance (that you are prepared to repay) to reset your "highest balance charged" or switch to another card issuer.
Well, OK. Credit card companies raising your interest rate if you miss a payment.
No way. Credit card companies jacking up your rate if you're a few days late.
Late payments can happen to virtually anyone. Payments get delayed in the mail; online bill-payment systems experience glitches; issuers change addresses and payments go awry. Or people just make mistakes. Mistakes to the point of forgetting a payment altogether, though, is rarer. A skipped payment is thus a better indication that someone is having money trouble. The credit card companies know there's a big difference between late and skipped payments. That's among the reasons payments that are less than 30 days overdue typically aren't reported to the credit bureaus. But many issuers will still take advantage of your mistake by sending your rate skyward, even if your payment arrived only hours (not even days) late.
What to do. Don't carry credit card balances. Card issuers have far fewer ways to mess with you when you pay your balance in full every month. Otherwise, reduce the likelihood of late payments by setting up recurring payments in your online bill-payment system or by agreeing to an automatic debit so at least the minimum payment is withdrawn from your checking account each month. If you use any method other than automatic debit, you'll need to check the credit card issuer's mailing address each month to make sure it hasn't changed.
If you do get dinged with a late fee, or a fee plus a higher rate, talk to your credit card company. Many issuers will waive late fees for good customers. Fewer will rescind the interest rate hike, but you can always try. Some will restore your original rate after 6 months of on-time payments.
Well, OK. Credit card companies charging late, over-limit and balance transfer fees.
No way! Charging outrageous late, over-limit and balance transfer fees.
Until the mid-1990s, the typical penalty fee was about $10. Last year, the average late fee was $35 and many companies charged $39. The average over-limit fee was slightly more than $32. Some issuers also removed limits on the balance transfer fees they charge. In the past, the typical balance-transfer fee was 3% with a cap of around $75. Today some cards issued have no cap, which means a $5,000 transfer could cost you $150.
It makes sense to charge borrowers something for handling a balance transfer, just as it's justifiable to subject them to some kind of penalty for paying late or going over the limit. It's the amount that's being charged that makes no sense. These fees bear little relation to the costs or risks involved.
What to do. Clearly, you want to avoid late and over-limit fees whenever possible. Set up automatic payments so at least your minimum balance gets paid every month. Track your balances -- which you can do online, via phone, by using personal-finance software or simply by writing down your purchases and keeping a running tally. You'll do your credit scores a favor by keeping balances to no more than 30% of your limits. If you do get dinged, ask your issuer to waive the fee. Before you transfer a balance, read the fine print and calculate all of the fees you're likely to face. With a little research, you can often get a better deal. Then use your low rate to help you pay off your balance; don't keep shifting it around.
Well, OK. Credit card companies issuing cards with low credit limits to riskier borrowers.
No way. Credit card companies issuing multiple cards with low limits to risky borrowers.
Credit card companies wisely limit their risks with certain customers by issuing cards with low limits, say $500. You're most likely to get one of these cards if your credit history is short or troubled. As you show you can responsibly use the credit -- by paying your bills on time and not maxing out your card -- a typical issuer will reward you by raising your limit. If you miss payments or go over your limit, though, you don't typically get more credit. It was recently revealed that one card company's practice is simply to issue additional low-limit cards to the same customers. The big downside for borrowers is that they have more due dates and limits to track. The practice increases the chances a cardholder will mess up and incur late or over-limit fees.
What to do. Don't max out your credit cards or charge more than you can pay off in full every month. Instead of accepting a new card, ask for a higher credit limit on the one you have.
Well, OK. Credit card companies charging interest on balance transfers.
No way! Credit card companies charging interest before the check clears.
This one may be a little tricky to understand...When you're approved to transfer a credit card balance, the company that's receiving your balance sends a payment to the company that currently has your debt. This payment may be electronic or may be a check. The issue revolves around when your new credit card company begins charging interest on the balance transfer. Some are reported to start doing so long before the balance is actually switched, which means you could wind up paying interest to two companies on the same debt for a week or even longer. The majority of companies begin charging interest as soon as they initiate an electronic transfer to the card issuer holding your balance. That's OK because electronic transfers tend to happen quickly, and the overlap period where you're paying interest twice is usually a day or two, at most.
If the issuer sends a check, though, policies vary. Some wait for the check to clear before starting to charge interest. Others begin to levy finance charges as soon as they cut the check. If it takes a while for the receiving bank to get and deposit the payment, you're the one who pays.
What to do. Is this a huge deal for a consumer? Probably not. Even with big transfers -- say, $10,000 or more -- we're still talking about only a few bucks a day and a total cost that's less than most late fees. But it's annoying nonetheless. Clearly, you want to try to press for an electronic transfer whenever possible.