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Common tricks and traps in credit card fine print

By Gary Foreman

The New Frugal You
New Frugal You columnist Gary Foreman
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com

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Question for the CreditCards.com expert

Dear New Frugal You
What are some tips you have about the fine print of credit cards? -- TD

Answer for the CreditCards.com expert

Dear TD,
You pack a lot of question into just a few short words. And you're absolutely right to be concerned with what's written in all that fine print in the terms and conditions of your credit card agreement.

Granted, none of us like to read those things. It's a little like going to the dentist for a checkup: Most of us don't like doing it, but we can avoid a lot of pain and expense later if we catch problems early.

To help answer your question, I contacted John Ulzheimer, president of consumer education at SmartCredit.com. He says, "When it comes to credit card agreements, the big print giveth and the fine print taketh away." It's almost as if the terms and conditions are written in a way that makes the average consumer not want to read them. I'll leave it up to you to decide whether that's intentional or not. A CreditCards.com special report evaluated more than 1,200 card agreements for readability, and found the average card agreement was so complex that it was unreadable to four out of five Americans.

In fairness, over the past few years some agreements have gotten a little clearer. That was one of the goals of the Credit CARD Act of 2009. But there are still a lot of traps for the unwary.

Ulzheimer points out some of those dangers. "The provisions of the credit card agreements you sign allow the credit card issuer to do a variety of things, many of which you may not have noticed in the fine print. For example, credit card agreements allow credit card issuers to pull your credit reports at their leisure to determine if your credit scores have dropped." Remember that if your score drops, the credit card company will look for a reason to increase your interest rate or reduce your credit limit.

Ulzheimer goes on to say, "Credit card agreements also allow the issuers to increase your interest rates to a predetermined amount called the "penalty rate" or "default rate" if you miss payments. According to a CreditCards.com survey of major credit card issuers, the mean default rate is 29 percent .

"And finally," he says, "the fine print likely notifies you that your interest rate is what's referred to as a variable rate. That means it can change without notice if the prime rate increases. Variable rate credit cards are often tied to the prime rate and when the prime rate goes up, so does your interest rate."

That last point surprises many people. They may think that they're getting a fixed rate -- unchangeable, like many home mortgages. The vast majority of cards issued today are variable. Even if you have one of the rare cards advertised as having a fixed rate, the rate is fixed for only the first year, under the CARD Act, but then your credit card company can raise it as long as it gives you 45 days' notice.

The fine print also may hedge and limit the appealing headlines that caught your eye in the promotional pieces. Banks offering credit cards have also been known to be very creative in offering zero percent cards. Like fixed rates, "zero percent" is defined in the fine print.  Often, this "teaser rate" is only for balance transfers and any new charges will incur a higher interest rate.

There's no end to the surprises that can be hidden in the fine print -- especially if you choose not to read it. Remember, you're bound to that contract -- whether you've read it or not -- the first time you use the card.

The bottom line? You really need to read all the terms and conditions on your credit card accounts. If you don't understand them, ask someone who's better versed in legalese to help translate. It's important to know what your rights and obligations are before those terms get you into trouble.

See related: Avoiding credit card traps

For more than 35 years, Gary Foreman has worked to help people get the most for their money. Prior to founding The Dollar Stretcher.com, he was a financial planner and purchasing manager. Gary began The Dollar Stretcher website and newsletters in April 1996. Today the website features more than 6,000 articles on different ways to live better for less. Gary has been interviewed by The Wall Street Journal, The Nightly Business Report, USA Today, Reader's Digest and other newspapers and magazines. Gary answers a question about a budgeting or saving issue from a CreditCards.com reader each week. Send your question to The New Frugal You.

Published: October 20, 2011


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