Just like Three-Card Monte, these tricks can clean out your wallet faster than you can pick a card, any card.
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Hey, buddy, want to see some card tricks?
We’re not talking Three-Card Monte, Jumping Ace or Lost Kings here. No false shuffles, double lifts, swing cuts, pinky breaks or other classic sleights-of-hand.
We’re talking credit card tricks. The expensive kind, in which over-limit fees, residual interest, default APRs and other surprises suddenly appear as if by magic on your credit card statement.
No, your credit card company isn’t exactly dealing off the bottom of the deck. In each instance, they are within their rights to take your money, thanks to the often inscrutable terms of your cardholder agreement. But just like Three-Card Monte, these tricks can clean out your wallet faster than you can pick a card, any card.
Some of these tricks may soon be outlawed by the Federal Reserve Board’s proposed Unfair or Deceptive Acts or Practices reforms. The public submitted a record 56,000 comments on the reform proposals, which the Fed says it will issue in final form by the end of 2008.
1. The closing date mind crunch
Cardholder Lynnae McCoy thought she was doing the right thing when she switched from paper to paperless billing on her 0 percent APR card. When she didn’t receive an e-mail notice of payment due around her customary statement date, she chalked it up to a transition glitch and made her normal payment at the usual time of the month.
The following month, her online statement showed that a late fee and interest had not only bumped her balance by $100 but shot her 0 percent introductory APR up to 11.24 percent.
To McCoy’s surprise, it turns out the card company had changed her closing date to later in the month. “Apparently my payment was posted one day before the new billing cycle began, so I ended up making two payments in one billing cycle and none in the next,” McCoy says.
Liz Pulliam Weston, author of “Easy Money,” sees this happen frequently to folks who try to buff their credit score by paying off a chunk of credit card debt a month before they apply for a major loan.
“The way the credit card computer systems are set up, they are only looking for payments between the statement closing date and the due date,” she explains. “So if you paid early and failed to make a second payment in that little window, then you’re counted as late.”
In other words, early birds get the shaft. McCoy admits she’s one of the lucky ones because she didn’t have other outstanding card balances whose rates may have similarly been bumped due to a highly controversial practice known as “universal default.”
After repeated, lengthy phone calls, McCoy convinced her card company to drop the late fee and restore her 0 percent APR, “but they didn’t take the interest off. It was about $37. I just gave up and paid it. There came a point at which my time was worth more than $37.” The McCoys have since sworn off credit cards for good.
Solution? “Pay off the card,” says McCoy. “That and persist. If you’re thinking about going to paperless billing, really stay on top of it, and maybe even make a small extra payment in the middle of the cycle until you’re sure when your billing cycle is.”
Gail Hillebrand, senior attorney for Consumers Union has an additional suggestion: “I think it’s actually quite helpful to not take paperless billing. I do think this makes it harder for the customer to hold up their end of the bargain and pay on time.”
2. The over-limit limbo
At the other end of your minimum payment is the credit limit on your card. What happens to those Icarus-like cardholders whose spending flies above their credit limit? They get burned by an over-the-limit fee that not only typically exceeds $35, but keeps recurring every cycle that they remain out in the blue. It’s the credit card fee that keeps on taking.
There are numerous ways to accidentally soar over your limit. You can charge over it, of course. A stray automatic payment for an annual or semi-annual insurance bill could do it. If you’re close enough already, an annual fee or even additional interest on purchases could exceed the ceiling.
Some card companies also use this clever trick: They suddenly lower your limit below your balance and then ding you with an over-limit fee.
Weston says the practice runs counter to what those credit card TV ads would have you believe. “Everybody has seen the commercial where the guy is taking his boss out to dinner and his card gets turned down,” she says. “Well, typically, they won’t turn you down because they can charge you that fee. The time you get declined is when you’ve really screwed up and it has gone to collections. You can wind up paying these fees to infinity.”
Flying a little lower financially may be your best option, however. “Try to stay under half your limit,” says Hillebrand. “It helps avoid the problem, it’s better for your credit score and it also leaves some reserve if you have to get your car fixed.”
3. Toad in the hole
Credit card companies survive on the simple notion that, left unchecked, a good number of us will choose to remain indebted to them ad infinitum rather than curb our spending. They prefer us to be toads in the hole, jumping in but never actually climbing out.
Toward this end, some card issuers limit the number of payments you can make each month to one or two.
“This really upsets some folks because they get paid weekly, they want to pay their credit card bill every week, and some are being restricted from doing so,” says Weston. “If you’re talking little payments, the company may not want to deal with them. It’s not in their best interest to help you pay your debt anyway.”
Similarly, as we’ve seen, most card issuers won’t allow you to pay your bill ahead. If you’re heading off for a summer in Tuscany, you’ll still need to land your monthly payments within the payment window (between statement date and payment due date) or suffer for it. And that window has recently been shrinking from 22 days to 20 days on some cards, further tightening the screws.
“You’re talking about prepaying, you’re not talking about any kind of favor,” says Hillebrand. “I think it’s a policy issue that the issuers should be looking at, especially now because its really important to not miss a minimum payment because the consequences can be so drastic.”
Solution? “Automated payments that pay your minimum every month is the best way to go about that,” says Weston. “Set it up through your credit card because they’re the ones who know the minimums. If you don’t do it that way, you can just look at the balance you typically carry, figure out what your average minimum payment is, double or triple that and make that your automatic payment.”
4. The ghost account
Want to try something really scary? Close a credit card account without looking at the final statement. The small balance left behind — often a dab of interest or occasionally a fee for making your final payment by phone — can grow to a monster in no time once the domino effect of late fees, default APR and interest get rolling.
The most common ghost in a closed account is residual interest; that is, interest that was generated between the time the bill was issued and your payment was received. It can be darn hard to see, but it will haunt you if you ignore it.
“It’s very confusing, when you look at your online statement in particular, to figure out how much you actually owe,” says Hillebrand. “The statement balance will be one thing and the actual balance will be something different. How do I get to zero is really the question that should be easier for the consumer to answer.”
Solution? “The best way to avoid residual interest/finance charges is to make sure the balance is paid in full,” says American Express spokeswoman Mona Hamouly. “Do not stop making payments after the account is canceled. Payments must continue to be made by the payment due date each month until the balance is paid in full.”
Also, to protect your credit score, be sure to request a letter from your card company confirming that the account was closed at your request, not theirs. Hamouly says AmEx mails confirmation letters at their card member’s request within 10-12 days of the closure date.
Weston adds this tip: “Hang onto that last statement so you can prove you paid it off.”
5. Revenge of the sock puppet
There is so much confusion over the impact that closing a credit card will have on one’s credit score that some cardholders simply choose to “sock-drawer” their unused cards — that is, they tuck them in the back of their sock drawer and forget them.
“It’s very hard to give any general rules of thumb because it depends in part on how many cards you already have,” says Hillebrand. “If you have too many cards, closing a unused one can help you. But if your other cards are maxed out or close to maxed out, closing an unused card will up your utilization rate, making it look like you’re using more of your available credit, and that’s going to hurt your credit score.”
The downside to “sock-drawering” is its potential for identity theft. If someone steals or clones your card and has its statements sent to them, they could quickly run it up without your knowledge.
Although “sock-drawering” is one card trick we usually play on ourselves, Weston says card companies are increasingly getting in on this game.
“In this environment where companies are very concerned about profits, they are much more willing to shut down an unused account than they have been in the past,” she says. “I just had one shut down from underneath me that I had for over 10 years; I never used it anymore and boom, they closed it. It didn’t really hurt my credit score, but if you had a marginal score you were trying to improve, that could really hurt.”
Solution? “If you have too many cards and your credit score is good, 750 or above, you can close some of your more recent cards,” says Weston. “Do it slowly over time. You want to keep your oldest and your highest limit cards active. Charge something small to these accounts, such as newspaper or magazine subscriptions, and have it paid automatically. That will keep them active so they’re still showing on your credit report and are less likely to be closed.”
See related:Feds backs rules to curb deceptive credit card practices, Rules proposed for credit card fee disclosures, Canceling a credit card and your credit score, Understanding how credit scores work, An interactive guide to credit reports