We all know how credit card companies deliberately write unintelligible legal mumbo jumbo a seasoned lawyer might have difficulty understanding. However, cardholders need to be wary of more than just the fine print.
Without a keen understanding of credit card trade craft, you leave yourself exposed to some counter-intuitive fees, penalties, charges, and rules that can leave your pocket a few pennies short.
Here are some credit card practices you ought to know about, but likely don’t:
1. Bait and Switch Your Rates
When you apply for a credit card that advertises its purchase interest rate at 19.99% and its cash advance rate at 22.99%, you expect to get those rates, correct? Not so much.
In fact, one Canadian credit card issuer reserves the right to approve you with a higher interest rate of 25.99% on purchases and 27.99% on cash advances. The problem is, you don’t know which rate you get unless you apply and after you’ve been approved.
2. Hike Your Rates
We all know and expect that if we make multiple late payments, our interest rate gets jacked. Not ideal, but it’s a self-inflicted wound that’s understandable. But did you know, that some credit card companies have reserved the right to raise your interest rates at their own discretion?
Whether you’re late or not, some credit card issuer have written in to their agreements, that after reviewing your “account use” or your “credit bureau reports and credit history”, they can raise your interest rates. They do have to provide you notice in advance, but if you already have a balance with them, it might be difficult to find another home in time to avoid the rate hike.
3. Increase Your Rates Retroactively
You know those store credit cards offering 0% financing? Well they really do work. However, if you’re ever late, buyer beware. Most people think if they miss a payment their rate will jump from 0% to the penalty rate of 28% from that point forward. Wrong. That’s just the beginning of it. Even if you only miss your last payment, or forget to pay off your balance at the end of the term, you could have to pay the 28% interest rate retroactively!
So let’s say you got 0% financing for 12 months on a $2,000 purchase. If you miss your last payment, the 28% interest rate will be charged against your balance from month one. It could cost you more than $560!
4. No Limits To Your Limit
You know those credit limits issuers stick you with? They’re not really limits at all, they’re more like guidelines. In fact, many issuers will gladly let you go over your “limit”. Why? Because they will then charge you an over-limit fee of $29 or more.
For example, if you have a $7,000 credit limit, and you buy a pack of gum that brings you to a balance of $7,001, you’ll be charged an over limit fee of $29 – an expensive pack of gum. But more importantly, if you thought your credit limit was a built in stop to overspending, think again.
5. Set-up Hurdles To Cash Back Redemptions
Some of Canada’s best cash back credit cards offer truly stupendous earn rates. However, a few have a trick up their sleeve that can put you in handcuffs. Specifically, they only give you your earned cash back at the end of every year as a statement credit.
What’s the big deal you ask? Well if you ever want to cancel your credit card before the end of the year, you’ll lose all of your accrued cash back earnings. What’s more, because it’s a statement credit, you’ll have to use your credit card again to actually get the value from the cash back. There are alternatives in the marketplace that allow you to redeem your cash back monthly, or anytime you want, in the form of a statement credit, deposit into your checking account or they’ll mail you a check.
6. Expire Your Points
Rewards expiry dates have gotten a lot of attention lately. There are many different policies out there, that in one way or another will expire your points. The best policies will maintain your points forever. Others will maintain your points so long as your credit card is active. Others will have your points expire if you’re inactive for a period of time. The worst policy of all will expire your points automatically after a set period of time, no matter how loyal a customer you are.
So make sure you know your programs expiry policy BEFORE you invest years of spend and effort in the program.
7. Forfeit Your Points
Several credit cards issuers will automatically forfeit your points if you’re delinquent on your account. While some will re-instate your points once you make your required payment, it’s completely at their discretion. While this policy seems fair, it’s kind of not. Think about it. If you had 100,000 points, and then fell on hard times and went into collections, you’d lose all your points. Chances are, if you made your payments months later, you’d never see your points again, even though you’ve become current.
One way to avoid this scenario is to use one of the Aeroplan credit cards or Air Miles credit cards. Because the loyalty program is separate from your credit card, even if you’re delinquent on your credit card account, the issuer has no recourse to your miles.
8. Devalue Your Rewards
Credit card rewards and loyalty programs are notorious for devaluing points. Contractually, they leave themselves the right to adjust the earn rates on their credit cards or the price of redeeming for an item, whether it be a flight, gift card or whatnot. The sneakiest way for them lower the value offered per dollar spent, is to increase the redemption cost of an item. While you continue to earn the same number of points per dollar spent, you’ll get less for it on the back end.
The most loyal customers get hurt the hardest. If you’re holding on to a big bunch of points that you’ve accumulated over years, all of a sudden they can be worth 10%-20% less through no fault of your own – it’s kind of like the hidden cost of inflation! Several Canadian issuers have tried this and have been met with stiff resistance, if not a class action. We’ll let you know how it turns out.
9. Switch Cards
Canada has seen its fair share of credit card portfolio acquisitions and subsequent portfolio conversions. Most issuers reserve the right to sell their credit card portfolio to whoever they want. The problem is, the acquirer can then change the terms of your credit card, with notice, at will.
In some of those cases, such as when Scotiabank acquired the Sears MasterCard portfolio, they migrated the acquired accounts into a different product (from a Sears Rewards card to a Scotia cash back card). Cardholders should not assume that the new card offers the same or better terms than their previous card. While on the surface it may look like it, some of the terms may be very different. Make sure to do a side by side comparison.
10. Monitor Your Transactions
Not much you can do about this one, but did you know that issuers routinely monitor your transactions, not just for fraud, but to assess your risk as well. For example, if they see you’re taking out cash advances at the casino once too many times, they may assess that you’re a credit risk and reduce your line of credit, increase your rates or even freeze or close your account. Big brother is watching.
11. Inconsistent Credit Reporting
We all know credit card issuers report your outstanding balances, payments and credit lines to the credit bureaus. But not all credit card issuers do it the same way. Some credit card issuers report at a point in time, for example on the 28th of every month, while others do it at the end of every billing cycle.
The difference can have a significant impact on you. For example, if you pay your bills on the 1st of every month, but your issuer reports on the 28th of every month, your credit card balance will be at its largest, when your issuer reports to the credit bureaus. As a result, when you apply for other loans, the lender may not extend you credit because of your high outstanding balance and credit line utilization, which can impact your credit score as well.
12. Sell Your Debt
Some Canadian credit card issuers actually sell your debt. If you go into collections, it’s very possible that after 180 days or so, your credit card issuer will give up on you and sell your debt to a buyer who specializes in collecting bad debts. At that point, you will need to make your payments to the new owner of your debt. Before you make any payments, you’ll want to confer, or have received a letter from your original lender, that they have in fact sold your debt.
All that said, be an informed consumer. We love credit cards. They’re great tools and we encourage people to use them responsibly. Done right, you can actually flip the tables on credit cards issuers and exploit the rules to your advantage. Done wrong, and even the best credit card can burn a hole through your wallet.
So actually read through your credit card agreement. If nothing else, you may learn about a few new features on your credit card you had no idea about.