What Credit Card Companies
Don't Want You to Know
by Teresa Dixon Murray
You know that it's expensive not to pay off your credit card balance and that if you make only the minimum payments it'll take you a while to pay the whole bill.
But it's unlikely that you have taken the time to figure out how long that payoff will take. If you make minimum payments on a $2,500 balance at 18 percent interest, it'll take you 34 years to pay it off. By then, you'll have paid out $6,431 in interest on top of the original $2,500 bill.
If you have a balance closer to $7,000, like many households, making only the minimum payments mean it'll take you 50 years to be debt free.
Consumer advocates believe most consumers don't fully realize the deep pit of minimum payments. And, come to think of it, it can also be confusing to keep track of changing interest rates and figure out where all of the fees and finance charges come from.
Here are a few things that may save you money on your credit card bills:
1. Minimum payments are forever.
Making only minimum payments can affect your finances for the rest of your life. The bottom line: Pay off your debts as soon as possible.
If, instead of paying $200 a month on credit cards for 25 years, you invest that money at 12 percent interest, you could retire in 25 years with $1.3 million.
Most credit card companies set minimum payments at 2 percent to 2.5 percent of the balance, or a minimum of $10. That means the minimum payment might be as much as $140 on a $7,000 bill, but it shrinks slowly as you chip away at the debt, stretching out the time to completion.
How much difference does it make to pay a little extra beyond the minimum? It's amazing. In the earlier $2,500 example that would take 34 years to pay off, the minimum payment would start at $50 and gradually drop. But if you continued paying that same $50 a month instead of the shrinking minimum, the payoff would take you about eight years instead of 34.
And if you paid $75 a month? It would take less than four years. $100 a month? Only 2 1/2 years (in all cases, assuming you made no more purchases on the card).
2. The sky's the limit.
You might believe your credit card interest rate is limited under your state's usury laws.
But usury laws adopted by most states apply according to where the credit card company is located, not where you live.
After the U.S. Supreme Court in 1968 paved the way for states to set their own interest rates, a handful of states deregulated their interest ceilings to attract banks. Two of the states that are most friendly to creditors are Delaware and South Dakota, where credit companies flocked after 1968.
Today, six of the top 10 banks with the highest volume of credit card lending are in Delaware, according to the Federal Deposit Insurance Corp.
3. Nothing is permanent.
Credit card companies can change your interest rate, payment date, minimum payment and anything else just by giving you 15 days' written notice.
Actually, the written notice is required only if you have a fixed-rate card. If it's variable, it can change without notice.
Credit card companies will offer amazingly low interest rates just to get you to open a new line of credit.
However, that amazingly low promotional rate, that is supposed to last perhaps six to 12 months, may be voided if you miss one monthly payment or your payment is one day late. Your fixed rate might jump by 5 percentage points if you pay late or exceed the credit limit one time.
4. Grace is gone.
Years ago, creditors started charging interest on purchases after your next statement came out. As creditors have tried to increase profits, they've started charging interest from the day of purchase instead, if there is a balance on the account.
If you're charging a major purchase, like a trip you won't be able to pay off in the first month's bill, you should have two credit cards. Put the major purchase on one and use the other for incidentals that you often charge for convenience (such as pay-at-the-pump gas.) If you put such purchases on the same credit card as the trip, you'll be paying interest from the date of purchase. With a second card, you can pay the balance each month and avoid finance charges.
5. Paying early is better than paying on time.
If you're not paying off the entire balance in any given month, it's almost always better to make your payment as early as possible - don't wait until the due date.
Why? Most creditors calculate finance charges on your average daily balance. If you make your payment a week or two early, that will lower your average daily balance for the month.
6. Hours count.
Creditors must post payments within 24 hours of receipt, according to federal law.
But the Federal Trade Commission increasingly fields consumer complaints that card companies don't post payments promptly. In some cases, late postings allow creditors to hike the interest rate.
Mail your bill a week or more ahead of the due date to reduce the risk of a delay.
7. Even prompt payers can get hurt.
Traditionally, a creditor imposed higher interest rates only if you started paying its bill late. Now creditors usually review your credit report one to six times a year to look for indications that your credit is slipping.
If a creditor sees that you're running up balances on several cards, it can declare you a higher risk and raise your interest rate - even if you've never made a late payment.
8. You can't pick what you pay off.
Many cards will attract consumers by offering a low rate on balance transfers, say 5.9 percent. If you then use the card in the future for other purchases, the rate on those transactions might be 15.9 percent. That's clear.
In some cases, however, if you make a payment, policy says it'll be applied to the lower interest balance first. You can't specify that you want some of it toward your higher-interest balance, so you end up paying more in the long run.
9. You can just say no.
When they change the interest rate or other terms, many creditors are required to give you the option of rejecting the changes. The catch is that if you have a balance and use the card for new purchases, the higher interest rate will automatically kick in.
Rejecting a higher interest rate can be beneficial if you carry a balance. In many cases the company is required to allow you to pay the account off in monthly installments under the old interest rate. This is law for companies in Delaware, for example, where most major creditors are based.
10. Credit insurance is a bad policy.
Creditors offer insurance in case customers die or lose their job and can't make their payments.
If you need life insurance, you should buy it and make your spouse the beneficiary, not your banker.
Besides being disproportionately expensive, such policies generally have so many exclusions and exceptions that the coverage doesn't do what you expect.
Copyright 2000 Plain Dealer Publishing Co.
Plain Dealer (Cleveland, Ohio) June 26,
2000,
BYLINE: By TERESA DIXON MURRAY; PLAIN DEALER REPORTER
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