Monday, June 4, 2007

Bad Credit Card Behavior

Sometimes credit cards behave badly. We aren’t talking about misuse of cards by the consumer. We’re talking about nasty things the credit card companies do. When that happens, you could pay the price. Here are some examples of bad credit card behavior.

1. Raising the interest rate ‘cause they feel like it. Some credit card companies will raise the interest rate any time for any reason. If this happens, you’ll probably have the option to avoid the increased rate by not making more charges or taking more cash advances. If you stop using the card, the old interest rate would remain. You would need a new credit card—try to get one with a low rate. If at all possible, don’t knuckle under to the new higher rate. Stop using the old card and get a new one.

2. Universal Default—Kicking You When You’re Down. Many credit card companies place you in default if you fail to pay any of your obligations. Let’s assume you have two credit cards, a mortgage, a car loan and a student loan. Miss a payment on any of these obligations and some credit card companies consider you in default. Then, they impose fees and raise the interest rate (often sharply). While they mumble feeble excuses about how a single car payment 1 day late makes you a bad credit risk, their use of universal defaults creates a self-fulfilling prophecy where they shove you toward bankruptcy by greatly increasing your obligations even if you’ve been a perfect customer of theirs. Like a pack of wolves, they descend on the weak at the first scent of blood.

3. Credit Limit Smackdown. Sometimes, if you exceed your credit limit, the card company doesn’t stop you from making a charge. They let you go over your limit, and then smack you with an over-limit fee and a sharply increased interest rate. The limit isn’t a limit at all. It’s an excuse to ratchet up the charges. Keep track of how close you are to your limit. If you’re within a few hundred dollars, stop using that card (have a buffer of a few hundred dollars in case your math is off). Pay cash or use another card.

4. Charging Interest on Debt You’ve Paid. If you make $1,000 of charges in a month and pay $500 at the end of the month, some credit card companies charge you interest on the entire $1,000 balance for a month, even though you paid 50% of it right away. This is all because you carried a partial balance into the next month. In this hypothetical example, they’d effectively get twice the nominal interest rate on the amount of debt that’s carried over into the next month. You are penalized for being good instead of perfect.

5. Piling On. Once a customer makes a mistake, some credit card companies pile on. You are slapped with late fees and increased interest rates. If all these fees and charges push you over your credit limit, you get nailed with an over-limit fee. And if you have trouble paying off your increased balance, you can be hit with more over-limit fees in subsequent months along with the very high interest rate. In extreme cases, all this piling on might double the amount you owe. Talk about sprinkling salt on a wound.

What can you do? First, live within your means and avoid carrying a balance over from month-to-month. If you pay the balance at the end of each month, you come out ahead (because you effectively get an interest-free loan for the month). As soon as you start carrying a balance into the next month, you become their b*tch.

Second, pay on time. This applies to all of your debts, so that you don’t get stomped by a universal default.

Third, keep track of how close you are to your credit limit. Stop using the card whenever you’re within a few hundred dollars of the limit. Pay down the balance (at least partially). If that's not possible, pay cash for new purchases or use another credit card.

If you’re the type to carry a large balance from month-to-month, and constantly flirt with the credit limit on the card, you’re an enabler of bad credit card behavior. Remember that enablers are ultimately part of the problem. Live within your means. Be alert to how you’re using the card. Remember that it’s easier to avoid a credit card problem than to get out of one.

Crime News:
Food fights don't pay.

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