Why Credit Cards Can Be Expensive
Many credit card companies use hidden fees and complicated interest rules. These tricks can increase the total cost of using a card.
Gerri Detweiler, author of The Ultimate Credit Handbook, says some companies even avoid customers who pay their balances in full every month. Instead, they may offer those customers a card with an annual fee or suggest switching to a debit card.
Because of this, consumers must understand the real cost of a credit card before signing up.
Understanding Credit Card Interest Rates
Introductory offers may look attractive. Many cards start with a very low interest rate for a short time. Later, the rate can jump to 18% APR or higher.
Card issuers know that many people will not pay off their balance before the higher rate begins. As a result, customers often end up paying much more interest than expected.
Some credit cards also charge two different interest rates. One rate may apply to balance transfers, while another rate applies to new purchases. This can increase your costs without you noticing.
Interest rates can also rise if you miss a payment. Detweiler says some rates jump from 12% to 19.8% if a payment arrives even one day late. In many cases, that increase stays in place permanently.
Why Grace Periods Matter
A grace period gives you time to pay your bill before interest begins. If you pay your balance in full each month, you should choose a card with a grace period of at least 25 days.
Some cards start charging interest immediately after a purchase. Others offer only a short grace period, sometimes as little as 20 days after the transaction.
If you wait until the due date with these cards, interest may already apply to your balance.
However, if you carry a balance, the grace period no longer helps. In that case, the card company charges interest every day until you pay the balance.
Watch Out for Credit Card Fees
Credit card companies often add extra fees. These charges can increase the total cost of using a card. Always read the fee disclosure section before applying.
Here are some common fees to watch for:
Annual Fees
Many cards charge a yearly fee for using the account. If you have good credit and pay your balance each month, you can usually find cards without this fee.
Account Closure Fees
Some companies charge a fee when you close your account. According to Detweiler, these fees can reach $50. The only way to avoid this charge is to check the terms before opening the account.
Late Fees
Credit card companies charge late fees if your payment arrives even one day after the due date. A late payment can also trigger a higher interest rate.
Fixed vs. Variable Interest Rates
Some cards offer a choice between fixed and variable interest rates.
A fixed rate usually starts slightly higher. However, the rate is not truly permanent. The company can still change it, but they must give 15 days’ notice before doing so.
Variable rates change based on national interest rates, such as the prime rate. These rates can rise or fall without advance notice.
Because of this, you should always check how your interest rate works and review your statements regularly.
