How to Decide about the Viability of Credit Card Offer

Those Tempting Credit Card Offers:
Lures to Unfair Gouging?

During a March 2007 U.S. Senate Investigations Hearing on unfair credit card practices, senators lambasted the officers of several major credit card issuers for their “unfair gouging” of the American consumer. Among the complaints against them were the “Come-on” interest rates the companies endlessly extend to lure unsuspecting people into accepting a new credit card.

These so-called “introductory interest rates” are definitely low, as low as 0 or 1%. Alluring, indeed, especially if the potential applicant finds himself already steeped in debt. The offer looks like a fine opportunity to pay off those debts with a higher interest rate that the consumer is already saddled with, and to carry on with spending-beyond-his-budget as if the lower interest rate will put more money in his pocket.

However, the “fine print” tells a different story. The credit card offer that looks so attractive at first glance just about always carries conditions that sorely undermine its practicality. For one thing, the introductory rate usually applies only to a balance transferred from another credit card. Furthermore, the rate commonly remains at that fixed low rate for only 6 months to a year.

These two conditions themselves may not detract from the offer’s appeal to the applicant. “Okay,” she says to herself, “I’ll just transfer my other debts to this card and pay the new one off within the introductory rate’s period of time.” That might be okay, IF the lady can stick to her plan, and IF she doesn’t add any additional purchases to the card.

However, emergencies happen, vacations are desirable, birthdays are coming up, cars break down, and this is, after all, The Consumer Nation. There’s a more than a 50/50 possibility that this nice new card will have some other charges added to it by the cardholder, charges beyond the initial balance that was initially transferred onto it to obtain the low interest rate.

This is where another few words of “fine print” fall into place. In most cases, when the cardholder makes new purchases of goods or services, those charges are billed at a higher interest rate. Remember, the low rate most often applies to “balance transfers” only!

But that’s not all. There’s another fly in this ointment – when the cardholder does make payments on the card, those payments will be allocated FIRST to the balances with the lowest interest rates. Not a penny of her monthly payments will be applied to the charges for goods and services at the higher rate until the lower interest rate balance is paid in full. This is an inescapable, industrywide practice.

If the restrictions already discussed aren’t enough to encourage a potential cardholder to get out a magnifying glass and really, really read the really, really “fine print,” perhaps the following common industry practices will make the examination worthwhile.

*Interest rates* are not “fixed” for long. And, they are not even “fixed” within the same account. The Government Accountability Office (GAO) found that 28 cards issued by the 6 credit card giants typically charge one rate for cash advances, another for ordinary charges, another for balance transfers. Since the interest rates fluctuate with the prime rate these days, all of the rates vary with regularity. The trend right now is toward higher interest rates. The GAO discovered that, in 2005, 57% of the accounts held by those six major card issuers paid interest rates from 15% to more than 30%.

When evaluating a credit card offer, many other costs also demand notice, among them: *Penalty Fees* *Late Fees* *Pay-to-Pay Fees* and *Over-the-Limit Fees*; these fees are exorbitant; some have declared them “extortionary.”

At this time, “late fees” and “over-limit” fees range from $30 to $34 a month. Furthermore, once these kinds of penalty fees have been incurred, they become part of the credit card balance and interest is charged on them, too, forever and ever, until the entire balance is paid off.

While the “pay-to-pay” fee is less “expensive,” settling in at from $5 to $15 per event, the Senate Subcommittee found it to be “a travesty.” This is the fee card issuers charge consumers to pay their credit card bill, on time, over the telephone. It’s worth noting: If the bill is paid via the internet, there’s no charge; but if it’s paid over the telephone, there’s a fee.

So, read the fine print.

I know. I know. Reading that tiny block of fine print, squeezed onto the very bottom of the back page of the offer, makes you bleary-eyed. However, if left unread, it can also break your bank.