The 5 Worst Credit Card Practices

This is a guest post from Patrick of Cash Money Life. If you want more information, check out his “About” page. If you like what you see here, please consider subscribing to his RSS feed.

Credit card companies are always coming up with new and innovative ways to extract fees from their customers. It’s reached an unfortunate point where credit card companies make most of their money from the mistakes and misfortunes of their customers. These huge profits come in the form of fees, late charges, and other penalties.

What follows is a list of the 5 worst credit card practices…

1. Super High Interest Rates: There is no federal law to limit interest rate charges; those laws are covered at the state level. In fact, most credit card companies incorporate in Delaware or states that have no interest rate ceilings, which allows them to charge such high rates!

2. Double-Cycle Billing: Some credit card companies have found a way to charge more interest to their customers and even make them pay interest for debt they have already paid off! Double-cycle billing, also called two-cycle billing, charges interest for the average daily balance for two cycles: the current cycle, and the previous cycle. With this practice, credit card companies can charge their customers for debt they have already paid off.

3. Universal Default Interest Rate Ladder: The Universal Default Interest Rate Ladder is something the credit card companies can use to raise your interest rates to a ‘default’ level when there is the perception that lending money to you takes on a higher amount of risk for them. Credit card companies regularly screen their current customers’ credit reports for any of several universal default triggers. These may include exceeding your credit limit on another card, a single late payment on another credit card, a decline in your credit score, having too much debt, adding additional lines of credit such as a home mortgage or auto loan, or even applying for more credit, whether it is approved or not! The universal default rate can cause your interest rates and payments to skyrocket! The worst part is, you won’t even know it was applied until you get your next bill.

4. Pre-Approval Does Not Mean Pre-Approval!: Credit card companies buy lists of credit scores and other information to solicit new customers. I’m sure most people reading this have received numerous ‘pre-approved’ credit offers with teaser starting interest rates and low fixed rates after that. Read the fine print. That ‘pre-approved’ offer is actually, “…subject to meeting qualifications. Those who fail to qualify will be offered one of our other lines of credit.” Usually at more than 20%. Unfortunately, you won’t know which offer you qualified for until after you receive your card. This is risk based pricing at its finest. Here is how to opt out of pre-screened credit card offers.

5. Cardholder Agreements That Require a Law Degree to Understand: Seriously, have you ever tried to read those things? I consider myself an intelligent person, and I just give up on reading them and make sure I pay my bill on time! Actually, that is what the credit card companies count on, only they don’t want you to pay on time. In the cardholder agreement, you will find information pertaining to Worst Credit Card Practices 1-4 of this list, plus the Honorable Mention – Late Fees. Be sure to read and understand the cardholder agreement before applying for the card!

Honorable Mention – Late Fees: According to Consumer Action, a California consumer group, late fees averaged $28 per month in 2006. The highest was $39. That is a lot of money to add to a credit card bill – especially because the person receiving it likely can’t afford it in the first place.

The best way to handle these unfavorable credit card practices is to read and understand the fine print in the cardholder agreement. If there is something in the agreement you don’t like, don’t apply for the card.

If you already have the card, you have to be diligent to make sure you don’t pay extra fees or penalties. You can also try contacting your credit card company to try and have some fees reduced. This may work once or twice, but I wouldn’t rely on this as a long term solution.