Watching Out for Sneaky Credit Card Traps to Avoid Debt, Bankruptcy
Most consumers rely on credit because they think it’s convenient – but the reality is that, for most folks, credit cards are anything but.
Sure, when you can’t afford a purchase, plastic will help buy you time until payday. But when you make paying with credit cards a habit, you’ll ultimately pay the price. What most credit-holders don’t realize is just how much credit issuers have them over a barrel. Credit companies aren’t offering you a convenient service; they’re trying to make a profit. And that means taking advantage of you every chance they get.
For credit lenders, the ideal customer is someone who maxes out their cards each month, then makes just the minimum payment. If they make that payment late, even better.
Let’s say you have $10,000 in credit card debt. Because you carry a large balance and are likely to be late with payments, you probably have a relatively high interest rate - maybe 25 percent. If you’re paying just the minimum – and therefore not reducing your debt – you’ll pay $2,500 a year in interest alone! And those late payments? The resulting fees could add another $500.
Credit issuers are betting that their customers will fall right into their sneakily set traps. But you don’t have to take the bait. By avoiding common credit card errors, you can enjoy all the benefits of credit – without the usual drawbacks.
Tricky Interest Rates
While 15 percent is often quoted as the average credit card interest rate, a survey by DailyFinance.com found that 75 percent of participants paid more than 15 percent. And of course, if you make a common mistake like going over your limit or missing a payment, expect to see that rate rise.
Many people sign up for new credit cards hoping to take advantage of a promoted 0% introductory rate. Unfortunately, these offers are typically too good to be true. Sometimes, 0% APR applies only to balance transfers, which means you could be unexpectedly paying a high rate for any new purchases. If purchases are included, rates usually expire very quickly – often before you realize it. And remember, it takes just one mistake for the creditor to hike your interest rate to outrageous heights.
There are two types of fees you could find yourself paying while using your credit card: punishment fees and transaction fees.
If you’re late on your payment, exceed your credit limit or bounce a check, expect to pay an average of $35 per violation. But even if you make timely payments, you can still be hit with transaction fees. For instance, cash advances and foreign transfers both come with a fee. And increasingly, credit cards are charging annual fees of $50 or more a year. Just because a card comes with a seemingly reasonable rate, doesn’t mean it’s a good deal. It’s important to weigh all costs when considering opening a new credit account.
Most credit issuers only require you to pay 4-6 percent of your balance each month – what’s known as the minimum monthly payment. This low rate isn’t for your convenience, however; it’s so credit companies can milk you for more money. When you carry a large balance, making small payments allows interest to accrue each month, keeping you in debt – and paying bills – longer. In some cases, balances can actually keep growing as you make your monthly payments.
The minimum monthly payment is the ultimate credit card trap. If you make an effort to pay more than the minimum, you’ll get out of debt far sooner – and waste less money on interest while doing it.
Even if you follow all the rules, you can still get into trouble with credit by nature of having too much debt. Simply carrying a large balance or using a large percentage of your available credit each month will severely impact your credit score – even if you pay your bills on time.
The more of your bill you can pay each month, the better. And it may go without saying, but when credit card debt is out of control, stop adding to it. What if you can’t afford to forgo plastic? When debt is too much to handle alone, bankruptcy can be the most realistic option for relief. At DebtStoppers, our experienced bankruptcy attorneys can help you determine whether bankruptcy offers an effective solution to your overwhelming credit card debt. Call or email us today for a free personal debt consultation.
Credit Card Traps to Avoid, by Nick Clements, DailyFinance.com