The #2 Credit Card Sleight of Hand: APR Tricks and Traps
With most loans, you know what interest rate you’re paying on the loan. With credit cards, however, knowing what interest you are paying on outstanding balances is not that easy. The fine print of credit card agreements contains numerous subtle points about the annual percentage rates (APR). These include several little tricks and traps, which can easily cost card holders a lot of money. Here is a guide to the two main APR tricks and traps.
The #1 APR Trick
Credit cards come with not one, but multiple interest rates. There is one APR for purchases, another for balance transfers, and yet another for cash advances. And, if your card goes into default, there is also a penalty default APR.
Because of the many different types of APRs, it can be very confusing to figure out the actual interest you’re paying on outstanding credit card debt. That in itself wouldn’t be so bad, except for one clever little sleight of hand: all credit card payments are applied to the balance with the lowest APR first.
For cards with a 0% APR balance transfer, for example, any purchases made on the card will rake up high interest charges until the 0% APR balance is completely paid off.
The same applies for cash advances, which typically accumulate interest at around 22.99%. If the card balance is paid off every month, this doesn’t make that much of a difference. However, for people carrying a revolving balance, who also regularly take out a cash advance, it means that a significant portion of the debt over time will earn interest at the expensive cash advance APR.
The #1 APR Trap
When people sign on the dotted line for a bank loan, the agreement with the bank clearly states which interest rate they’ll be paying and how much the monthly payments will be. Even in the case of adjustable rate mortgages, there are very clear guidelines for when the interest rate can be changed and how much.
With credit cards, there are basically no rules that protect borrowers against changing terms. The Terms and Conditions of credit card agreements give credit card companies the right to change the card APR at any time, for any reason. And when credit card companies say “change,” they typically mean “increase.”
It used to be that card issuers would mainly raise interest rates on card holders as a penalty for falling behind with other payments. However, as card companies are feeling the squeeze of the economic crisis, they have become much more aggressive at raising interest rates. Now, even consumers who play by the rules are seeing their credit card interest rates increasing to a dizzying 24.99%, or higher.
This is the #1 credit card trap, because when the interest rate goes up, so do the monthly payments, and there is nothing you can do about it—other than pay the debt off. This makes it very difficult to manage credit card debt, because you will never be able to predict how high the monthly payments will be.
As always, the best defense is an offense—if you carry credit card debt, take steps to pay it off as quickly as you can. If your credit card APR does get increased, call your card issuer to see if you can negotiate a lower rate.
