Are credit cards good or evil? That depends how you look at them. I think of them as a tool, much like a computer, car, phone, etc. While none of these things are inherently bad or good, they certainly can be used to do bad things. When it comes to credit cards, often times we are the ones responsible for making poor choices with them. However sometimes, it’s the banks that are the bad guys by tricking us and trying to pull one over.
Whatever the case may be, as someone who runs a forum/blog all about credit cards, you can bet I’ve heard my fair share of stories over the years from all sides of the table. Based on that information, here are what I consider to be the 5 biggest credit card traps you need to watch out for. These traps can either bury you deeper in debt – or – if you’re debt free, they will cost you a lot of extra money.
#1. Deferred interest promotions
Without a doubt, this is the most frequent complaint I hear about on CreditCardForum. If you’re not familiar with deferred interest, let me explain it to you.
In a nutshell, you are given 0% for a certain period of time. Let’s use 12 months for this example. If you pay off 100% of the full amount before the 12 months is up, you will not get charged any interest. However if you even carry a sliver of that balance over past the 12 months, you will be socked with interest (the “deferred” interest”) going back retroactively to the date of purchase.
Be careful because this is how most retail credit card promotions work (i.e. department stores, furniture shops, etc). Combine that with their APRs that often run into the 20’s, this can be an expensive mistake to learn the hard way.
#2. Unscrupulous fees which are not very transparent
Thanks to the recently enacted credit card reform, I don’t hear about this quite as much nowadays but it is still a major trap nonetheless.
Although rare, some cards (namely retail cards) are currently charging $1 monthly fees just to get your bill in the mail. In order to avoid it, you have to enroll in e-billing. When it comes to major credit cards, banks have still found ways to charge inactivity fees on some customers’ accounts (although the fee is usually called something else). However the worst are secured cards that folks use for rebuilding their credit. Some charge – get this – an annual fee, a monthly fee, a payment processing fee, a customer service phone call fee, and an application processing fee!
My best advice to avoid these? This may not be fun to do but reading the fine print (all of it) is an absolute must, on any credit card you use. Looking at customer reviews/comments isn’t a bad idea either, but you still need to see the fine print for yourself because the terms and conditions are constantly changing.
#3. The temptation of balance transfer checks
The two traps above are more the bank’s fault, but when it comes to the balance transfer checks, I think we largely need to take responsibility. You know what I’m talking about… those darn checks that come in the mail from your credit card company offering 0% interest. Sometimes they’re for balance transfers but more often than not, they can be written out to anyone including yourself! We might let this temptation get the best of us and the next thing we know, we’re in debt.
If you find these checks alluring, then I recommend a couple things. For starters, call your credit card company and make sure you opt out of receiving them. They will do this but you have to ask. That alone will help reduce the temptation since your mailbox will no longer be bombarded with them.
What else I recommend is remembering what The Bible tells us about debts. There are so many verses that can help us keep our head on straight when it comes to this problem. Just do a Google search for something like “Bible verses about debt” and you will find at least a couple hundred. However the easiest way for me to spend wiser is to remind myself that it is God’s money I am spending and not my own. When you start thinking like that, you are much more careful with money.
#4. Rewards causing you to spend more
Rewards can be a blessing if you are earning them on your normal spending. However for some people, they are motivation to spend more, whether that is done consciously or subconsciously. Ironically, this increased spending to save money actually leads to losing money, sometimes a lot of money, if it leads to debt.
All of us that use credit cards (and coupons for that matter) need to take a good hard look in the mirror and ask ourselves if they are causing us to spend more. Be honest with yourself. If the answer is “yes” then no matter how generous the cash back or points may be, you will be better off cutting out credit cards completely. Remember, earning 2% to 3% cash back is trivial compared to spending 20% to 30% more!
#5. Reward programs that are sneaky
So in #4 we talked about rewards leading to increased spending but how about for those who don’t have that problem? For them a major trap to be on the lookout for is the structuring of their rewards program. It seems that over the years, banks continue to get sneakier with how they operate these programs. Reward tiers, rewards caps, having to “opt in” to earn rewards, and many other tricks can feel like you’re being robbed.
Because Bank of America is the largest credit card issuer in the country, their BofA WorldPoints program is a good example to discuss, since it affects so many people. Almost all of the Bank of America credit cards (as well as those they manage for other banks) participate in this program. The way they have it setup is quite sneaky. In order to get the normal $0.01 per point value, you usually have to save up and redeem an astronomical number of points… 25,000! If you redeem just 5,000 points, instead of getting the expected $50 gift card or $50 statement credit, you only get $25 worth. Although this trap won’t make one go into debt, many on CreditCardForum seem to feel it is a bait and switch trap because their points aren’t worth nearly as much as they are portrayed to be.
This is a guest post by Michael, the founder of CreditCardForum. It’s a forum and blog where people can discuss credit card deals and drawbacks without being censored. The reason he started the site was because a severe auto accident when he was 18 left him with massive medical bills, which were charged to credit cards. Thankfully he is debt-free today!
Photo credit: sovietmole
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