Visa, MasterCard, Discover, and American Express Blue and Optima are credit cards. You can charge up to a certain limit and carry most of the debt forward from one month to the next. Interest is levied on the unpaid balance.
No central organization sets the interest rates and charges on MasterCard and Visa cards. Each issuing bank determines its own, so costs vary widely. There are wonderful cards and rotten cards, depending on the deal.
Department store cards are credit cards too, but they usually have a lower credit limit and a higher interest rate. It usually pays to use your bank card instead of the store’s card unless the store offers discounts to frequent shoppers. When you shop, you may be offered 10 percent off on that day’s purchases if you’ll apply for a store card. Don’t do it unless you’ll really use it.
American Express’s classic Green, Gold, and Platinum cards and Diners Club are charge cards. You pay the full bill at the end of each month, although some credit is allowed. For example, you can stretch out payments on airline tickets or other big-ticket items charged to American Express. Unlike most credit cards, charge cards carry annual fees.
What’s the Best Credit Card?
The best cards charge no annual fee and offer low interest rates to people who carry debt. My general advice is to own just two cards: (1) a convenience card, for bills that you’ll cover by the end of the month. Buy all perishables, such as restaurant meals and gasoline, with this card, as well as all other items you know you can pay for immediately; (2) a low-interest card, for major purchases that will take several months to pay for. Charge only items that will last a long time, because those are the only ones worth paying interest for.
The trouble is, that advice is too simple. Low-rate cards can turn into high-rate nightmares if you’re just one day late in paying your bill. What matters nowadays is how you handle your card do you keep its up-front, honeymoon terms, or will you fall into one of the costly traps that the banks lay for you?
Interest Rate Outrages
Card companies play around with interest rates today. You think you’ve signed up for one rate—in fact, you’ve got it in your budget—when suddenly you’re charged more. That’s another reason to avoid consumer debt. It almost always turns out to be more expensive than you thought. In 2009, President Barack Obama signed the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act), which eliminates some of the abusive practices. Unfortu¬nately, it applies only to purchases made in February 2010 or later, so consumers with older debt can still be taken advantage of. What’s more, plenty of bad practices remain. Here’s what to watch out for:
■ “Fixed” interest rates. “Fixed,” my grandmother’s left foot! When you sign up for this card, you assume your rate won’t change. That makes you just the kind of sucke—um, customer—the bank wants. In the fine print, you’ll find a state¬ment saying that the bank can change rates, fees, and other terms whenever it wants and for any reason. And be assured, it will. Starting July 1, 2010, the fine print has to specify how long this so-called fixed rate will last.
■ Variable interest rates. The majority of cards today charge variable interest rates on your revolving balances. Variable means that the rate changes in line with market interest rates. Typically, you pay a certain number of percentage points over the bank’s prime rate (the prime is the benchmark lending rate). For example, you might pay prime plus 5.99 points. If the prime is at 8.25 per¬cent, your card will charge 14.24 percent; if the prime rises to 10 percent, your card will charge 15.99 percent. If the prime rate drops, your rate should too— although there’s a floor below which it’s not allowed to go.
Generally speaking, applicants with impeccable credit histories can get no-fee cards charging 2 or 3 percentage points over prime. A decent history gets you 5 or 6 points over prime. Anyone with a heartbeat and a mailbox can get a card charging 8 percent or more over prime. The bank can change these point spreads whenever it wants.
When the prime changes, the bank won’t necessarily change your interest rate right away. Some change rates monthly, others change them quarterly. The bank might also pick the highest rate during any 90-day period, which extracts extra dollars from its customers. It’s all there in the fine print.
■ Teaser rates. These are the superlow rates that card issuers dangle when they’re trying to sign you up. They last no longer than a few months, then jump to the standard rate. Sometimes they cover only balances transferred from another card, not new purchases. When you’re choosing a card, the standard rate is the one to evaluate, as well as the possible default rate (see below). Your best long-term bet: a low-rate card, even if it lacks a spiffy introductory offer.■ Mystery rates. Practically all cards today are actually offering mystery rates, not the interest rate you see in the ad. The bank may trumpet that a rate is “as low as” 7.9 percent. But that’s only for applicants with top credit scores. When you receive your card, you may find that you’ll be charged a much higher rate. The gyp is that you can’t find out until you apply, which makes it impossible to compare the true interest rates available to you in the market¬place. This is totally unfair. In fact, banks may deliberately market to people with poorer scores dangling a low rate but knowing that applicants will be issued only high-rate cards (they call this practice downselling). Your credit limit also might be lower than you expected.
■ Default or “penalty” rates. These also give the lie to the low rates that you see in ads. Every card has a default rate that it charges people who make mistakes. Were you one day late in paying your bill? Your interest rate might rise. Were you one day late a second time? It will jump again. Did you accidentally charge more than your credit limit? Up the rate goes. Ditto if you pay the bill with a check that bounces. Did you take a new card because it offered you zero inter¬est on your debt for the first 12 months? A late payment will bounce your zero rate up to the card’s high rate on cash advances—and higher if you misbehave again. Even worse, the rate will be charged retroactively, from the time you got the card.
Penalty interest rates are running anywhere from 23 percent to 41 percent, with no end in sight. (They’re disclosed in the fine print; check “Terms and Conditions” or “Pricing and Terms” if you’re card hunting on the Web.) It’s cheaper to borrow from the Mob. Starting in February 2010 penalty rates can be charged only on new purchases, not on older purchases that you’re carrying on your card. That is, unless your payment is more than 60 days late. In that case, the bank can charge the high default rate on your older purchases, too.
Also starting in 2010, banks have to cancel any new penalty rate added to your card if you’ve made on-time payments for six consecutive months—so be sure to do it!
While you’re paying penalty rates, charge nothing more. Concentrate on reducing your debt. If you can, find a card that offers you a better deal. Reminder: if you pay late or go over the credit limit, there is also a fee. So you’re hit twice.
■ Residual interest. Never heard of this? Neither had I until a reader questioned the math on his credit card statement. He had been carrying a balance and, in February, paid it in full (he thought!). In March he found an additional and unex-pected charge on his card. It turns out that the interest clock had kept running from the time he paid the bill until the time the payment was credited to his account—in his case, seven days more. That’s residual interest, another cheat. Not all banks charge it (check the fine print in the credit card agreement). To avoid it, you have to call the bank and ask how much you’ll owe, say, seven days from now, and pay that amount, not the lower amount shown on your bill.
■ Daily compounding. Banks used to compound the interest on credit cards monthly; now most of them do it daily, which costs you more.
■ Higher rates on cash advances. You’re charged 23 percent or more for drawing on your credit card for cash.
Quinn’s Next Article: More Credit Card Traps to Avoid
From MAKING THE MOST OF YOUR MONEY NOW by Jane Bryant Quinn. Copyright © 1991, 1997, 2009 by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, Inc.
