|Lessons From the School of Card Knocks
Mistakes choosing and using credit cards can be
costly and aggravating. Here are 12 errors many
consumers make and tips for avoiding those plastic pitfalls
Credit cards can offer tremendous benefits, including the ability to buy goods and
services now and pay
for them later. Unfortunately, many people make mistakes when choosing and using credit
then pay the consequences later with extra costs, excessive debt and frustrations that
could have been
We're sure you know that credit cards often are safer and more convenient than cash.
by merchants across the globe, they're a source of cash or payment in an emergency, and
guarantee hotel or travel reservations. And depending on the circumstances, if you're not
happy with a
purchase you made using a credit card, you may have the right to withhold payment until
the problem is
But chances are there's still a lot you don't know about credit cards that, if you did,
might make them
even more valuable. That's why FDIC Consumer News has put
together a list of common mistakes to
avoid. Our list primarily involves mistakes with "bank cards" issued by
individual banks, thrifts and credit
unions under the VISA or MasterCard label. Even so, many of the same lessons apply to
cards-- American Express and Diners Club (both of which have no pre-set spending limit but
payment in full each month), the Discover card, and limited-purpose cards offered by
companies and other corporations.
Choosing a Card
1. Choosing a card for the wrong reasons. About two-thirds of the
card-holding Americans carry a
balance on their card each month and pay interest on that debt. Yet many of these same
people get an
offer for a card with no annual fee and they jump at the chance, without considering
whether the interest
rate is high. They could pay far more in interest charges than what they save on annual
Then there are people who choose a card primarily to get free airplane
tickets, bonus points toward trips or cars, cash rebates, the logo of a favorite
organization or sports team on the card, or other "rewards." They can end up
paying more in fees or interest than the value of their "freebies." This doesn't
include cases in which people buy items they might not otherwise buy- just to rack up more
points or miles on their card.
In general, if you expect to pay your credit card bill in full each month, your best bet
is a card with no annual fee and the kinds of rebates or rewards you expect to use the
most. If you don't expect to pay your card balance most months, go for a card with a low
interest rate and the right mix of rebates or rewards to justify any fees.
2. Misunderstanding card offers. It's easy to assume too much or read too
little when sorting through
solicitations. At first glance, every offer may look like a good deal. But there are
differences and potential
dangers, depending on how you plan to use your card.
Interest rates: A low interest rate prominently featured in a mailing or advertisement
actually may be
a short-term "teaser" rate that, as noted in the fine print, may increase
dramatically after six months
or so. That low introductory rate also may only apply to balances you transfer to your
other loans or cards you have, and not to any new purchases you put on the card. Be aware
interest rate advertised as "fixed" still can be changed with advance notice to
card holders. And if
your card company does raise your rate for any reason, that new rate usually will apply to
outstanding balance plus new purchases.
Interest calculations: Consumers who routinely carry a balance on their credit card should
attention to how their interest is calculated. Perhaps the most common and the most
methods for consumers is the "average daily balance" approach, where you'd have
a 15- to 30-day
"grace period" to pay before facing charges on the daily average for that
period. However, a few
cards have much costlier calculation methods, including the "two-cycle" system.
Under that method,
if you pay in full one month but only pay part of the bill the next month, you'll be
for both months instead of just one.
"Pre-approved" offers: This doesn't mean you're guaranteed a card. It means a
indicates you may meet the income, employment and other criteria the card company might
a customer. You still must apply for the card and await the results of a credit check.
Also, you're not
guaranteed the credit limit stated in your offer.
Before you sign up for a credit card, carefully review the solicitation and the
application. By law, key
terms must be disclosed; they're usually described in a separate box somewhere on the
If after reviewing these documents you don't understand something, call the card issuer
and ask for an
3. Not shopping around for the best deal. It's a big mistake to assume
that interest rates, credit limits,
grace periods and other card features are pretty much the same no matter which card you
"The fact of the matter is that rates and terms may vary widely," says Alan Cox,
a consumer affairs
specialist in the FDIC's Division of Compliance and Consumer Affairs in Washington.
issuers are private businesses, they set their own standards and fees according to the
internal marketing strategies." Even within one bank you can find several different
types of rates and
terms being offered on credit cards.
You can shop for good deals nationwide, for free, by checking the listings of cards and
numbers that appear regularly in major consumer and financial publications. Also, twice a
Federal Reserve Board collects and publishes the interest rates and other terms being
offered by many
card issuers. The Fed makes this information and general shopping tips available in a
"Shop: The Card You Pick Can Save You Money." It's available by mail (Federal
Publication Services, Washington, DC 20551) or on the Fed's Internet site .
You also can purchase lists of low-rate or no-fee cards regularly compiled by groups that
the credit card industry. They include the nonprofit Bankcard Holders of America (524
Salem, VA 24153, phone 540-389-5445), which currently charges $4 for its report, and
such as CardTrak (P.O. Box 1700, Frederick, MD 21702, phone 800-344-7714), which charges
4. Having too many credit cards. There are good reasons to have more than
one card, especially if your
credit limit isn't high enough on one card to suit your needs. You don't want to be
traveling and discover
you can't charge a hotel room, car rental or airline ticket because you'd exceed your
credit limit. Even so,
most experts agree that two or three general-purpose cards and a few (if any) cards issued
by stores or oil companies should be enough for the average family.
What's wrong with too many cards? One, they make overspending too tempting. And two, they
part of your credit history. Your record will show the number of cards you own, the total
eligible to borrow on your cards, the number of times you've applied for cards, plus your
can haunt you the next time you apply for a loan you really need-- perhaps a mortgage or a
"Even if you don't owe a dime on those cards now, the possibility that you could
borrow up to your credit
limit in the future could make a lender question whether you'd be able to meet all your
obligations," says Lisa Kimball, supervisor of the Minneapolis office of the FDIC's
Compliance and Consumer Affairs.
Using a Card
5. Getting too deep in debt. Each year millions of people drown in debt--
from mortgages, home equity
loans, auto loans, credit cards and other borrowings. Many people bring on their own
troubles-- they can't
control their spending or manage their finances wisely. But many others are responsible
became overwhelmed by expenses or reduced income triggered by a serious illness, a job
loss or some
other unforeseen event.
If you've got a serious debt problem, there may be corrective steps you can take involving
your credit cards. For example, you can reduce your expenses by paying off the balance on
your highest-rate loans first-- usually your credit cards-- even if you have higher
balances on other loans. Also, you can pay for future purchases using a debit card, which
deducts funds directly from your bank account. There also are reliable credit counselors
you can turn to for help at little or no cost. Unfortunately, there also are scams
masquerading as "credit repair clinics" and other companies that charge big fees
for unfulfilled promises or services you can perform on your own.
For more information about dealing with problems-- including rebuilding your credit
history with a "secured" credit card-- read our spring 1996 story "How to
Climb Safely out of Debt," which is available
free from the FDIC Public Information Center.
6. Running up fees and penalties that could easily have been avoided. Pay
your credit card bill late--
even by one day-- and you may face interest charges on the outstanding balance plus your
purchases. Pay with a check that bounces or exceeds your credit limit, and you could pay
$20 to $30 in
penalties. Become a habitual offender and your card company could significantly raise the
interest rate on your card. These problems can be avoided simply by keeping better
financial records and being aware of your card's fees explained in the fine print. And
make sure your payment arrives at the card company by the due date; having it postmarked
by that date won't suffice.
Many consumers also use their credit cards to get quick cash at an automated teller
machine (ATM) or
teller window, or they use one of the blank checks or "convenience checks" that
card companies send to
customers. In many cases these "cash advances" carry sizable up-front fees--
often two percent of the
amount advanced and not less than $2-- a higher interest rate than regular card charges,
and no grace
period before interest begins accumulating. You may be better off writing a check, using a
debit card or
charging purchases rather than trying to pay in cash.
7. Skipping a payment or paying less than you can afford. It's tempting,
especially during the holiday shopping season, to take advantage of an offer from your
card company to "skip a payment" or two. You
also might like the idea of paying back only the minimum required each month or even
reducing your minimum payment. But these aren't really good deals, especially if you can
afford to pay off all or much
of your card balance.
When you pay only the minimum on your credit card bill, you're simply taking more time to
pay off your
debt. That means more money in interest charges-- perhaps thousands of dollars and a debt
that takes 10 or 20 years longer to pay than necessary. Your card company also may begin
to see you as more of a risk and decide to substantially increase your interest rate.
8. Not closely reviewing the notices sent by your card company. Card
issuers are required to give you
notice (typically at least 15 days) before increasing your interest rate, lowering your
credit limit, adding
fees and penalties, reducing or eliminating your grace period or cutting back on bonus
programs. But if
you don't monitor your monthly billings or other mailings from your card company, you
could end up
paying more for a credit card that offers you less-- and not even realize it.
So, to avoid paying a higher interest rate than you expected, to avoid penalties for
actions that in the past were allowed, or to make sure you still get the services and
bonuses you want, read that junk mail! This also gives you the opportunity to negotiate a
better deal from your existing card company or shop around for a new card.
9. Not correcting errors in your monthly billings. Many people don't check their monthly
statements for overbillings. And even those consumers who do spot a problem don't resolve
it the right way. For example, in the case of a simple overcharge, the Fair Credit Billing
Act allows you to withhold payment on a disputed amount until the situation is resolved.
But to be fully protected, you must report the problem to your card company in writing
within 60 days of the postmark of the bill.
"A phone call-- even numerous phone calls-- may not be sufficient," warns the
FDIC's Lisa Kimball. "I've
seen several cases where people ended up responsible for fraudulent charges because they
the card issuer over the telephone."
If there's a problem with your monthly bill, immediately call your card company's
toll-free number to
report the matter. In addition, Alan Cox of the FDIC suggests that you follow up with a
note that includes
your name and account number, and details why the charge is incorrect. Send your note to
designated on the bill for handling errors; do not send it in the same envelope with your
payment. If you
don't get an answer or acknowledgement within 30 days, follow up in writing using
certified mail for proof
of arrival. Keep a copy of all correspondence for your records. And be aware that you're
still expected to
pay the rest of your bill that is not in dispute.
10. Not catching errors in your credit report. Credit reports are
compiled by private "credit bureaus"
for use by lenders, employers and others who have a legitimate need to know about your
and reliability. Chances are your credit reports describe how much you charge each month
on your credit
cards, whether you have problems paying your loans back, and whether you've filed for
bankruptcy in the
last 10 years.
| Update: New Law to Make It Easier to
Obtain and Correct Your Credit Reports|
In an important development, Congress in November 2003 passed a new law that can help you ensure the accuracy of your credit information and monitor your credit files for signs you may be a victim of identity theft. The law will enable you to obtain a free copy of your credit report once a year from each of the three major credit bureaus; this provision will take effect over a period of nine months, beginning December 1, 2004, in western states and moving east with completion scheduled for September 1, 2005. Nationwide as of December 1, 2004, you’ll have the right to learn your credit scores, which are designed to help predict how likely you are to repay a loan or make payments on time. As of that same date, merchants also must notify you if they plan to report negative information about you to a credit bureau. The Federal Trade Commission (www.ftc.gov) and the Federal Reserve Board (www.federalreserve.gov) have issued rules to put the new law into effect.
Unfortunately, the people who supply and collect data for credit reports sometimes make
resulting in wrong or obsolete information being in your credit reports. That's why it's a
good idea to
review your credit reports periodically to get any errors corrected as soon as possible.
First, call the three
major credit bureaus (Equifax at 800-685-1111, TRW at 800-682-7654 and Trans Union at
800-916-8800) and find out how to request their reports about you. You can find other
credit bureaus in
your phone book under "credit bureaus" or "credit reporting."
Sometimes your copy is free, but if not, the
most you can be charged is $8. If you spot any errors, the Fair Credit Reporting Act sets
timetables for getting them corrected.
11. Not taking precautions against lost or stolen cards. Under federal
law, if your credit card or card number is used by a thief, the most you're liable for is
$50 per card. If you contact your card company before any unauthorized charges are made,
you owe nothing. Still, credit card fraud is a national problem and one reason interest
rates are higher on credit cards than on other types of loans. Here are some tips for
First, never give your card number, confidential "PIN" (personal identification
number) or similar personal information over the telephone unless you originate the
call to someone you know is legitimate. Always save your receipts to compare to the
monthly card statement, then destroy them. As for new card applications and blank
"convenience checks" you receive in the mail and don't intend to use, destroy
Second, immediately notify your card company if your card is lost or stolen, or if you
fishy in your monthly billing. If you've been a victim of fraud, contact the National
Center (phone 800-876-7060, or on the Internet). The NFIC is a project of the National
League in Washington, and it reports suspected frauds to the appropriate law enforcement
agencies. More suggestions appear in the winter 1994 issue of FDIC Consumer
News in a story called "Protect Your Plastic," available from the
FDIC's Public Information Center.
12. Closing out a card for the wrong reasons, or in the wrong way. Many
consumers try to cut costs
by transferring the balance on one card to a new card offering a super-low introductory
some later find out they're paying about the same money or more. That can happen if you
down the transferred balance before the low rate expires-- usually within six months-- or
if the transferred
balance is subject to hefty cash-advance fees or other charges. So, look before you leap
from one card to
If you don't use a card anymore, cancel it out. Why? As we said previously, too many cards
credit record could prompt a lender to reject your application for a mortgage or some
other loan. Also,
even if you don't find the card of much value, a thief who takes it from your home or
wallet can use it
Once you decide to cancel a card, take the following precautions. First, send a letter to
the card issuer
stating that you decided to stop the card. This clarifies, for your credit records, that
the card was closed
by you and not by the card issuer because of any problems you may have created. Also, cut
up your old
card and dispose of it in such a way that a thief rummaging through your trash can't piece
it together and
get your account number and expiration date-- it's all he needs to go on a shopping spree
over the phone.
Given the intense competition in the card industry and the profits to be made, you might
be surprised at
how far a bank or other card company will go to sign you up or keep you as a customer. So
if you're not
happy with your card's interest rate, credit limit or other terms, or if you just don't
like the way a problem
is being resolved, try to work things out with the card company directly.
If you can't resolve a complaint on your own, consider contacting the government for help.
There may be
a consumer protection law or regulation that these offices can enforce or provide
Remember, a credit card can be one of your most important possessions. With more than
and companies now offering credit cards, chances are you'll find at least one or two cards
to your liking!