President Barack Obama is expected to voice concerns about the lending practices of credit card firms when he meets today with executives of those firms.
At issue is how to protect consumers, particularly in a severe economic downturn, from what many consider to abusive and deceptive practices that squeeze people into paying much higher fees or interest rates than anticipated. President Obama and lawmakers are moving towards restrictions on the industry that too often takes advantage of its customers.
Credit card industry wide practices have come under fire as the economy continues to have rising unemployment and threatening inflation. For many families, credit cards may be the last line of credit available in desperate financial situations. It's easy to get trapped in mounting credit card debt, and if at all possible, consumers should watch for some of the more pervasive tricks of the industry. Among these are:
– Low Interest Rate Lure # 1: Cash Advance Enticement …
With some cards, you pay one rate for purchases and a higher rate for cash advances. Worse, your payments may be credited to balances with lower APRs before higher APRs.
It's a common trick with a painful lesson attached. You can choose to chart a different course.
Tip: Pick a card with the same rate for everything.
Example: To get a lower interest rate, you transfer the $ 8,000 balance on your old credit card to a new credit card with a 5.9% APR. Then you use your new card for a $ 2,000 cash advance. But there are two catches.
1) Interest on cash advances is 19.99% APR.
2) The fine print reads, "Allocates your payments to balances with lower APRs before balances with higher APRs."
Which means that your monthly monthly payments are going towards the balance with the 5.9% APR for purchases. No payment amount is applied to the $ 2,000 cash advance.
Translation: Until you pay off every penny of the $ 8,000 balance that's growing at 5.9% APR, you'll have a separate $ 2,000 balance growing at 19.99% APR. And slowly, quietly turning into a mountain of debt.
– Low Interest Rate Lure # 2: 0% APR …
One day late, years of higher interest. A late monthly payment can cost you a lot more than a late fee. It can raise your rate in a ï¬ash. And that super-low introductory rate will disappear. In its place, you could ï¬nd a shocker: May be 19.99% APR. Even 19.99%. Or higher.
Tip: Mail your payment at least a week in advance of the due date, and use the pre-addressed envelope. Hand-addressed envelopes could have been held up in the mailroom and count as a late payment hurting your credit score. Some companies report a late payment to the credit bureaus. If a credit bureau lowers your credit score, you might have to pay a higher interest rate when you buy that new car or new home. And that could cost you thousands of dollars over the life of the loan.
Example: You shift $ 10,000 from your old credit card to a new card promoting a 0% APR introductory rate. You pay $ 200 a month, the 2% monthly minimum, for three months. These three payments bring your balance down to $ 9,400. Then you're a day late with your payment and the rate jumps to 19.99%.
Making the same $ 200 payment each month, look how long it now takes to pay off the balance. And look how much more money it costs you because of the extra interest you're paying.
Payoff timetable at 19.99%: if you pay $ 200 a month, it takes 93 months to pay off $ 9,400. Plus, you're paying $ 9,093 in interest. That's a total of $ 18,493. A lot more than you bargained for.