Once Again a Warning about Credit Cards – 4 Areas to Manage

The economy is in a mess right now. Some of this mess is of our own making, some of it unavoidable and some of it not as bad as we think. Regardless, each one of us must maintain our own heads with our own finances and credit cards is the single most influence on our psyche, our pocket books, our wealth and finally our credit scores. Kind of large don’t you think?

So here you go. How do you maintain or manage your own credit cards? You always look for the hidden fees BEFORE you apply for new or even use existing credit cards because terms are changing without notices, bold print or a slap in the head to get your attention.

If you are the kind of consumer who opens your statements, pays the bill and either throws the statement away or tosses it into a pile, never to be looked at again, please think twice. Unless you log and examine your bills every month you may miss hidden fees that credit card companies are charging you to recoup the massive losses they are incurring at an alarming rate due to the financial crisis.

Take for example:

1. Rate Hikes

Unprovoked: In this troubled economy most credit card companies are doubling and sometimes even tripling the interest rates they charge you to buy on credit. They need to make up for their losses of income due to the economy and the amount of customers defaulting on their accounts. ( That’s another whole bucket of mess itself) . Keep in mind that you may not get a separate notice or a bolded and separate line item on your statement to draw your attention to a change. The only way you will notice a rate hike is by looking closely at your statement and knowing the interest rate as it had been versus what is calculating now. Here’s where not paying attention to your finances can really hurt you. Sooner or later you may notice your finance charges have gotten quite large but you may not notice that for a couple of months if even then.

Provoked: One of the things credit card companies are doing, again in reaction to the credit crisis, is to change their terms of interest. It would be a change in the default rate more than likely and that default rate is the rate you are charged should you pay late, go over your credit limit or default the terms of the credit card in any way. Once you have violated their terms the credit card company hikes your interest rate to the default rate which is sometimes double or more over what you were initially paying them. You then have to contact the credit card company to see if they have any redemption rules, rules that would allow you to return to your original interest rate once you have satisfied their requirements. This though, is an outside shot as many credit card companies are thrilled they could push you into the higher interest rate and are not likely to lower it for you anytime soon. It’s money out of your pocket and into their profits.

2. Cutting the credit limits to almost nothing.

Unprovoked: Credit card companies, because they can, may lower your credit limit to sometimes just $2-3 dollars over your current balance without warning. They may have decided that credit limits at a certain amount are just too high a risk for the company to take in these times and therefore lower everyone’s credit limits within that range whether a good customer or not. The only place you might notice the change is your statement if you pay attention. You could be the best customer in the world and still have your credit limit lowered.

The rub is in the lack of notice that this has happened to you. Again, if you are not paying attention you could ruin your credit, interest rate and definitely your credit score. How? By accidentally charging and going over your limit. If you are not aware you credit limit has been lowered to just above your current balance and you charge thinking you have room, when in reality you don’t, you can go over your credit limit. And once you go over your credit limit, the terms of the credit card allows them to charge you fees, overlimit fees which are expensive. They may then also be able to raise your interest rate to the default interest rate that is double, sometimes triple what it was initially. The financial effects of this can have a snowball effect on your debt and may be devastating to your credit.

Provoked: You can get your credit limit lowered all by yourself by your own credit card management behavior. Missing payments, lower credit scores, excessive borrowing and maxing out your credit limits are all red flags to credit card companies that they should lower their risk by lowering your available credit. Just like credit scores, your limits are reduced far faster than they are increased. Again you could contact your credit card company to see if they have a program by which you can satisfy certain requirements and they will reinstate your original limit. I would not hold my breath though.

3. International Fees

International fees are those fees international banks charge to flow transactions through them either to a foreign country or to the US. While international fees were normally 1-2% of the total balance they have now increased to over 3% in some instances. You don’t have to be abroad to be charged international fees. If you buy something from another country either through E-Bay or directly you will more than likely pay an international fee.

4. Credit Protection Plans

When you are approved for a credit card you are offered an opportunity to enroll for a credit protection plan which is charged monthly at $1.00 for about every $100.00 of credit limit. The implied protection you get is that in the event you are laid-off or become disabled your monthly payments, possibly your balance will be paid by the insurance company the Protection Plan uses.

DON’T EVEN THINK ABOUT IT. This is nothing but a money-making gimmick and very rarely does it do what you assume it should. Until you go to use it you don’t know about the strict loopholes they have enabling the insurance company not to pay on your behalf. By also invoking this program you may give the credit card company an excuse to lower your credit limit, enforce your default interest rate, freeze your account or maybe altogether close it as though they closed your account for your irresponsibility. And the clincher is that your credit score is harmed. For more information on credit card protection insurance read my December 12, 2008 blog, "Credit Card Insurance: Is it worth it?"

Be your best advocate and pay more attention to your bills than you have in the past.
Not everyone is an accountant but you can still protect yourself by just paying more attention to your finances and where they go every month under what terms. By not paying attention to your own finances you are turning financial power over to those who’s bills you pay rather than you, the consumer controlling your own financial destiny.

Credit Card Insurance - Is it worth it?

Be careful when you apply for credit with a credit card company. Consider this.
A customer applied for credit at Best Buy on Black Friday (day after Thanksgiving) because there were some very interesting interest free purchases that interested her. The provider of the credit card was HSBC (Household-Beneficial Corporation) on behalf of Best Buy. A camera was purchased for 6 months free interest. The Best Buy clerk took the filled-out application from the applicant, Sue and completed it online for her. Sue, being familiar with financial consumer issues and consumer applications was very careful not to fall into the "extra" trap on the application that she filled out. When the clerk used that application to complete it on their register, he didn't tell Sue about the "extra" that was automatic when he submitted her application. That "extra" is particularly a product most credit card issuers are now calling "unemployment credit card insurance". For a monthly fee based on the amount of debt on the card, the card holder is supposedly covered for a period of time indicating that the insurance company will make your monthly payments due to a lay-off or perhaps a disability. This policy will NOT forgive your debt should you experience a lay-off or a disability but merely make the monthly minimum payment over a specified period of time.

What did Sue do or not do when she purchased her camera? She made sure that no box was checked that indicated a subscription to anything additional other than her direct purchase of her camera on her credit application at Best Buy. She made sure the Best Buy associate understood this and made him uncheck that option box. Extras such as "credit protection enrollment" or "credit insurance" are sometimes by default (automatic) check marked and billed to you. By the time you get your first statement and in some cases a few months down the road depending on how closely you check your finances, you find that you might have been unaware of the new monthly premium charges on your statements. It's credit insurance and you didn't look closely enough when you applied if this has happened to you. Calling and cancelling does not refund for the time you didn't catch this and were covered. Like most insurance policies your fees only stop the day you cancel.

You may ask, why is this something I should watch when I apply for any type of credit card? The answer is simple. This is an insurance product and in and of itself it does not do what you think it will do. The best way to illustrate this is to understand what this product is. When you apply for a credit card you are becoming a financial customer to a card issuing bank agreeing that you will pay certain fees (finance charges) for the extension of credit over a period of time. You are given a credit limit at the time they accept you as their customer and give you a credit limit they believe you can handle. You may charge up to this limit but if you don't pay it off in total within 25-30 days (read the contract and fine print) you will be charged an agreed upon interest rate (finance charge) as indicated by the issuing bank. That is the way credit card issuers make their money. Along with that interest they collect, the credit issuers also believe (especially in this economy) that they can sell you another product that will net them a commission for selling it to you. That product is an small insurance policy (agreement) that will cover your monthly payments with this credit card company if you should be unable to pay due to unemployment or diability. This policy is said to make your payments and maintain your account while you are unable. Some conservative consumers might find this a good move to protect themselves and their credit but it actually is a very bad decision in most cases. It doesn't work. Why?There are so many requirements and exceptions that you will virtually be throwing your money away on this so-called protection. The outcome, should you become unemployed or disabled and unable to pay your obligations will be the same with or without this protection. You will still have late payments on your credit record that can't be erased and the bill will still not be paid. So don't let yourself fall into this trap.

Take, for instance a client of mine who needed help with his credit. He was a recovering credit client trying to improve his credit after a period of employment. He brought two credit cards he was approved for and allowed them to talk him into "credit protection". He was being charged $4.95 each month on each account for this protection. While unemployed he called these two credit card companies to take advantage of his "credit protection" policy he knew he was paying for. He was sent paperwork to work directly with the company who held the policy. He had to provide documentation and after months of application and clarification he was denied due to a clause cleverly crafted that keep the insurance companies covered. Not only was he out the $4.95/month he had been paying for the last year and a half, 6 of those months spent working back and forth with the insurance company got him 30, 60 and 90 day late dings on his credit, a cancellation of his credit cards and the remaining obligation plus interest demanded to be paid in full under the terms of the credit card agreement.

Before you sign up you have to decide whether the fees would be better spent on a life and disability insurance policy that would encompass all aspects of your life.
Specific policies such as these are typically more expensive, restrictive and rarely pay out.