The dirty secret of the modern credit card industry is that the banks don’t
want you to pay off your balance. Their profits go up if you only make “minimum
payments.” And they’re smart enough to know that if they ratchet the
minimum payment down low enough (usually between 2% and 4% of your
total balance), you’ll keep spending money and they can make a fortune
The Minimum-Payment Trap
Not surprisingly, they don’t want you to understand this. They don’t want
you to know that if you carry a $10,000 balance at an interest rate of 18%
(which is typical of credit card users who don’t pay off their bills in full each
month) and make only a $200 minimum payment each month, it will take
you nearly 32 years to get out of debt—and before you do, you will have
forked over nearly $15,000 in interest charges. And that’s assuming you
never charge another dime on the card, never get hit with a late charge, are
never billed for an annual service fee, and your interest rate never goes up.
Notice Interest Change Emails
Credit card issuers can change the terms of your account, hiking your interest
rate, lowering your credit limit, and shortening your payment deadlines, anytime
they want for no particular reason. Generally speaking, the bank must notify you of any changes at least 15 days in advance and give you the chance to opt out if you don’t like the new rules. (If you choose to opt out, they can close your account but you get to pay off your balance at the old terms.)
But don’t expect the notification to be all that noticeable. The banks deliberately design these notices to look like junk mail so most people will throw them away without opening them. The problem is that throwing out or otherwise ignoring the notice means you’ve accepted the new terms. You have to take action to opt out, either calling or writing to the bank.
There is one situation where the credit card company doesn’t have to notify you of a change: when an increase in your interest rate is triggered by what’s considered a default on your part—in other words, when you exceed your credit limit or make a late payment.
Most credit card agreements entitle the issuer to jack you up to a much higher penalty rate for violating any of the rules. And those penalty rates can be brutal. Some run as high as 35%. Since the banks are entitled to impose this kind of increase without warning, you should always scrutinize your statements, even if you don’t think
you’ve done anything wrong. An interest-rate hike may not necessarily be announced on a separate piece of paper. It may be buried somewhere on your bill.
Say No To Double Pay
If you pay part of your bill before the due date and carry over part of your balance, don’t assume that you’ll be charged interest only on the part of your balance that you don’t pay off. When you carry a balance, the bank cancels the grace period you normally get to pay off a charge without incurring interest. Instead, the bank calculates your interest charge based on your average daily balance for the entire month. Some issuers even charge in the rate based on average balance in last 2 billing cycles. That hurts!
In the meantime, check the fine print of your credit card agreement. Look in the disclosure box for the entry under “Method of Computing the Balance for Purchases.” If it says, “Two-cycle Average Daily Balance (including new purchases),” you’re being screwed and you should switch to another credit card.
Confusing Due Date
The quickest way to make your interest rate skyrocket is to pay your credit card bill late. Needless to say, the banks love it when you do this because it adds to their profits. As a result, they do everything they can to make it difficult
for you to pay on time.
When you’re paying your taxes, all the IRS asks is that you get your payment in the mail by the deadline date. Visa and MasterCard are not so easygoing. If you mail in your payment, it needs to arrive at the bank by the due
date; it’s not enough for it to be postmarked by the due date. To make matters worse, many card issuers have a daily cutoff—often 3 p.m. Eastern Standard Time—after which they will no longer credit your payment that day. And many won’t process payments made on a holiday or a weekend until the following business day.
So read your credit card agreement throughout and try to pay your bill four to five days before due date. You can call to the credit card company to ask them changing the due date to match with your salary schedule. Internet banking is also a good way to eliminate the risk of forgetting since it would setup an automatic payment for your credit card bill or reduce the time lag.
Avoid interest on credit cards always.