Tricks Credit Card Companies Use To Ramp Up Your Bills

Posted by Nick Niesen on October 29th, 2010

Credit cards, like most other areas of finance, can be difficult to fully understand and compare because of the amount of small print hidden away in the credit agreement. Let's be honest - how many people even take the time to read it, let alone understand it and see how it will apply to the cost of using their cards? Not many do, and the credit card companies know this. By hiding away some 'features' in the small print, they can often squeeze a little more profit from their customers, usually without the cardholder knowing or caring.

However, once you know about some of the tricks they use, you'll be ahead of the game and will be able to make more efficient use of your card, with lower monthly bills and smaller charges to your account.

The first trick, the balance transfer fee, is now very well known, mainly because advertising regulations mean that if it's present it must feature prominently in marketing material. This fee is charged as a small percentage of any balance transfer you make onto the card, usually after being attracted by a 0% introductory deal or a low rate for life offer. Unfortunately, balance transfer fees are pretty much a fact of life for credit card users these days, and it's all but impossible to get a balance transfer card with no fee. The best you can aim for is to get the lowest percentage fee possible.

As well as being used for purchases, credit cards can also be used to obtain money from cash dispensers, a feature known as a cash advance. This area is a real money spinner for card issuers. Not only do they charge a higher rate of interest for money borrowed in this way, sometimes twice as high, they usually charge a fee of two to three per cent of the money you withdraw as well. Furthermore, there's usually no interest free grace period, and so you'll be paying interest on whatever you withdraw, even if you settle the balance in full at the next statement. In a final, somewhat sneaky move, card companies have started to widen their definitions of a cash advance. Some usages of your card such as paying for online gambling are now regarded as cash advances by some issuers, and charged accordingly.

Perhaps the most insidious form of 'hidden' charge comes under the slightly obscure name of Allocation of Payments. This system means that any repayments you make go towards repaying the lowest interest kind of debt on your account first, leaving the more expensive parts of your debt untouched. For an example, if you transfer a balance of $5000 onto a card at a lifetime rate of 5%, and then make a cash advance of $200 charged at 25%, then that $200 will sit in your account attracting the higher rate until you've completely cleared the $5000 balance transfer. None of your repayments will reduce the amount of your debt being charged at 25%. This means that the only effective way to use a balance transfer facility is to transfer the balance, and then never use the card again for any reason until you've cleared the debt.

The last trick that we'll look at is the reduction of minimum repayments. Once, the normal repayment you had to make each month was around 5% of your balance. Over the years, this has fallen to an average of 2.5%, meaning that a higher proportion of each repayment goes towards paying interest, and less towards reducing your debt. A minimum repayment of 2.5% is only marginally higher than that needed to service the interest charges, and will mean your debt will take years longer to clear than it should, costing much more in interest. Even if it's only by a small amount, you should always try to pay more than the minimum required each month.