Editorial Policy

Watch Out for these Sneaky Credit Card Terms

Eva Norlyk Smith Ph.D.

September 13, 2012

Credit card terms overall have improved considerably since the Credit CARD Act of 2009 was implemented, there are still plenty of sneaky credit card terms to watch out for.

Cards for people with bad credit still vie for first place when it comes to worst terms and conditions — but people with good and excellent credit need to watch out for trickiness as well. Here’s a sampling of some of the more underhanded terms out there for both good and bad credit credit cards.

The 36 percent purchase APR
Would you apply for a credit card with a $300 credit limit charging a 36 percent purchase APR — and pay around $200 in fees for the privilege?

Probably not. However, such terms are the reality for numerous secured credit cards targeting people with bad credit. Take, for example, the First PREMIER Bank MasterCard. It is a secured card, which means that the credit limit is backed up by a deposit, typically $300 for a card with a $300 credit limit.

Upon opening the account, cardholders pay a 36 percent purchase APR for the privilege of borrowing money on a card with a credit limit secured by their own money.

That’s not all. Opening the account costs $95 (due before you start using the card), an annual fee of $75 for the first year ($45 after that) and a $75 yearly servicing fee (waived the first year). That means, for the first year of card ownership, you’ll pay $170 for a card with a $300 credit limit.

Is this legal? The CARD Act was supposed to limit the amount that so-called fee-harvester cards could charge to 25 percent of the credit limit during the first year of card ownership. For a credit card with a $300 credit limit, fees shouldn’t be able to exceed $75. However, that cap doesn’t apply to fees charged before an account is opened. Because First Premier’s $95 fee is charged before the card is opened, it doesn’t fall under the 25 percent cap. In fact, in 2011, the bank engaged in a court battle to make sure of it.

“Many issuers of secured credit cards have an infamous track record of ripping off low-income borrowers, and in our opinion, such terms are violating the CARD Act,” says Joe Ridout, a spokesman with Consumer Action.

What to do: People with bad credit looking for a secured credit card have more options than ever, and there’s no need to pick one of the bad apples in the barrel. Instead, look for the growing number of secured credit cards with reasonable terms. Consider a semi-secured card, which will allow you to secure a credit limit that’s higher than the deposit you’re required to put down.

The 5 percent cash-back rate that’s really 0.25 percent
Cash-back credit cards advertising 5 percent cash back on purchases may seem like a shopper’s dream, but look before you leap. You could end up with a card that effectively gives a measly 0.25 percent cash-back rate.

Sure, you can get 5 percent cash back — but the card’s terms may make it difficult. For example, the 5 percent cash-back bonus categories will generally rotate each quarter, and cardholders who don’t sign up for each new rotating category miss out on that rate. Many cards also cap the 5 percent cash-back earnings or limit the eligible categories to items most consumers don’t spend that much money on anyway.

For example, with the Discover More Card, the 5 percent cash-back earnings are capped at $1,500 in purchases each quarter. That means your cash-back earnings are limited to $75 a quarter ($25 a month). Plus, the 5 percent cash-back rate is limited to categories in which most people don’t spend that much money, such as gas, restaurants, movies and theme parks. Only one category — online shopping and department stores — is something the average consumer would realistically sink $1,500 into in a quarter.

The clincher? For all other purchases, the cash-back rate is a paltry 0.25 percent until you’ve spent the first $3,000 each year (after that, it’s 1 percent). And, no — purchases made in the 5 percent cash-back categories don’t qualify toward that $3,000.

What to do: Vote with your feet. Some 5 percent cash-back cards offer more favorable terms, including 1 percent cash back on purchases outside the 5 percent cash-back categories. Also check out cash-back credit cards that offer consistent value all year round (instead of rotating categories), such as the Blue Cash Everyday card from American Express, which offers 3 percent cash back on groceries, 2 percent on gas and 1 percent on everything else.

The 12.99 percent purchase APR that could jump to 29.99 percent
The CARD Act did away with much of the uncertainty surrounding credit card interest rates by limiting the circumstances under which issuers can raise rates — and stipulating how much notice they must give cardholders.

Yet there’s still a type of rate with teeth: the penalty rate.

Many credit cards now feature a 29.99 percent penalty APR, and it can be surprisingly easy to trigger. For example, some card issuers stipulate that a 29.99 percent penalty rate may be applied indefinitely if you do any of the following: make a late payment (even as little as a few days), exceed your credit limit, make a payment that is returned unpaid, or do any of those things with another card or loan you have with the issuer. In most cases, that penalty rate can be applied only to future purchases. Yet, if you’re more than 60 days late with a minimum payment, it can be applied to existing balances as well.

What to do: Make sure you have options. Always have access to more than one credit card, in case you trip the penalty rate on one of them. Second, keep credit card balances low and always pay on time. While card issuers reserve the right to apply penalty APRs, they are less likely to do so for cardholders in good standing whose business they want to hold onto.