5 Dirty Little Secrets about Credit Cards

By Eva Norlyk Herriott

Credit cards are one of life’s great contradictions: we love them; we hate them. We love credit cards when we swipe our card like a magic wand, instantly fulfilling our every whim. We hate it when those nasty credit card bills roll in at the end of the month and we realize that we, again, charged much, much more than we thought.

Alas, when it comes to credit cards, we’re all like the magician’s nephew: handling powers that can be hard to curtail. It’s easy for charges to get out of control and get trapped in a web of escalating debt. And unfortunately, credit card terms are structured to keep you stuck in that sticky web forever. Here are five dirty little secrets card issuers use to, so to speak, stack the cards against you:

Dirty Secret 1. Payments are applied to the balance with the lowest APR first. Whenever you make a payment, the balance with the lowest APR is paid down first. For example, if you make a 0% APR balance transfer, and then use the same credit card for a couple of purchases, guess what? Those purchases carry a much higher interest rate, but all payments will go towards paying off the 0% balance. In short, you’ll be paying the high purchase APR on those other charges forever, or at least till the entire balance of the card is paid off. That great 0% APR, in other words, just got wiped out.

Dirty Secret 2. Cash advances are stacked against you. While it may seem like cash advances put money in your pocket, they actually make money fly out of your pocket. First, there’s that nifty little 3% cash advance fee. Second, there is no grace period on cash advances, so interest charges start accruing right away. Third, cash advances typically come with much higher interest charges, as high as 24.99% or more. The clencher? Because payments are applied to balances with the lowest APR first, the balances with the sky-high cash advance APR will keep accumulating interest until the account is paid off in full.

Dirty Secret 3. The rules of the game can change at any time. With mortgages and car loans, when we sign on the dotted line, we know how much credit we’ll get and what the interest rate and monthly payments will be. We can plan and make our financial decisions accordingly. Not so with credit cards. Card companies can change the rules anytime, for any reason. All they have to do is give 15 days notice. That nice $10K credit limit? It could be gone tomorrow. That ‘fixed’ rate at 10.99%? Sorry, it just turned into a hefty 22.99%–or higher. That comfortable minimum monthly payment of $200-400? At any time, your card issuer could decide to increase the minimum payment from e.g., 2% of the balance to 4% of the balance, causing the monthly payment to double to $400-800.

Dirty Secret 4. For credit card interest rates, the sky is the limit. It’s a loan shark’s dream: No cap on interest rates, and perfectly legal too! Most credit card companies are based in states like South Dakota or Delaware, which have weak or no “usury laws” to put limits on lending practices. As a result, credit card APRs as high as 34.99% are not unusual, particularly for default rates triggered by late payments. Worse, if one card goes into default, it could create a chain reaction through all your credit cards, causing other issuers to crank your account up to the default penalty rate under what is known as the universal default clause.

Dirty Secret 5. When it comes to debt, slavery is not over. On the surface, that minimum payment appears to be one of the most user friendly features of credit cards. No matter how high the card balance, the minimum payment is typically a very manageable 2.5% of the balance. Alas, while it may look that way, that 2.5% minimum payment is not your friend. On the contrary, paying only the minimum payment every month, while interest charges keep ticking upwards, is a sure way to stay enslaved by debt forever. It’s like dividing fractions—you’ll never reach the finish line, or at the very least, it will take a very, very long time. That’s why you can’t afford to pay the minimum on your credit cards.

Published: May 22, 2009