Many credit cards are designed to catch consumers off guard with late fees, retroactive interest charges, penalty rates and other toxic landmines.
Some are justified, others not so much. Regardless, we’d like to give you a primer on some of the more common, and frankly, egregious examples of fine print trickery, in our opinion. The more you know, the less trouble you’ll get in, and the more you’ll benefit from your credit card.
1. When 0% Turns Into 28.8%
We’ve all seen the tantalizing 0% financing offers at your favourite retail stores. But get this, in many – if not most cases, if you make one late payment, or you fail to pay down your loan in its entirety when the promotional period ends, you’ll be charged interest retroactively, from the date of purchase.
Want proof? Check out the financing terms from Lowe’s Canada:
Or this from Home Depot:
In either case, if you miss a minimum monthly payment (it could be by an hour), or the date to pay down the loan in full at the end of the promotional term, you’ll be charged interest from the original purchase date! With 28.8% interest rates, that could be an absolutely devastating cost. If you ever wondered how banks could afford to offer 0% rates, you just found your answer.
Bottom line: Don’t get financing if you’re not sure you can pay off the loan when the promotional period expires. To ensure you never make a late payment, the minute you get approved for your loan, put it on automatic monthly payments.
2. Bait & Switch
How would you feel if you applied for one credit card with an advertised interest rate, but upon approval, you received a higher interest rate?
Not so good.
But that’s exactly what some issuers are doing. Instead of advertising an interest rate of 19.99% to 25.99% in the promotional material, or telling you what your interest rate will be before you apply, they leave themselves the option to issue you a credit card at a much higher rate, without leaving you the option to refuse it beforehand – all buried in the contract.
Check out Canadian Tire’s credit card contract terms:
Bottom line, make sure you know what your interest rates are before you decide to carry a balance. It may not be the one advertised in the big print. If you don’t want to risk being approved for a high rate card you won’t use, or you don’t want to waist a hit on your credit history for a card you don’t want, don’t apply!
3. Arbitrary Rate Increases
You may think that paying your bill on time, without fail, means you get to keep the interest rate you started with. With most credit card companies that is the case. With some, if your credit score goes down, or if the lender is trying to increase its own profitability, they leave themselves the right to raise your interest rates.
It is one thing to raise rates on future spend & balances, when providing notice. It’s quite another to raise someone’s interest rate on their exisiting balances, especially when they’ve never made a late payment.
President’s Choice MasterCard is one of the few credit card companies in Canada that give themselves the option to increase your rates, even though you’ve never been late. Here’s what their contract has to say:
Although PC Bank has to provide notice, you have no option to decline the rate increase. Your only option to avoid the rate increase on an existing balance is to pay your balance off, which isn’t an option for many.
Bottom Line: If you intend to keep a balance, only do it with a credit card issuer that will raise your rates if you’re delinquent with them.
4. When 0% Is Really 22.5%
No interest, no payments, sounds amazing right? Not so fast.
Some banks and retailers have begun charging “administration” or “merchant” fees. Check this out from Best Buy:
So, despite the fact that you just bought a new gadget for $399.99, at 0%, with no payments, for 12 months, you’re actually paying a fee of $69.99, on top of the retail price. Forget 0%, that comes out to an effective interest rate of 17.5%!
Check out this one from the Brick:
So let’s say you buy a love seat for $399, with a 12 month term. You’ll be charged a “merchant fee” of $89.95, giving you an effective interest rate of 22.5%! Might as well use a low interest rate credit card.
Bottom Line: Divide the annualized administration fee into your purchase total. If the effective interest rate seems too high, you might want to use cash, use a low rate credit card, shop around or forego the purchase completely.
5. When A Credit Limit Is Merely A Suggestion
Credit limits are meant to act as a limit on how much we can borrow on our credit cards. However, most Canadian issuers don’t really treat them as hard stops and will gladly allow you to go over your credit limit. The catch? They’ll charge you $29-$35 for it. So even if you go over your $2,500 limit by $.50 to buy a pack of gum, it will cost you $29 in overlimite fees.
Here’s an example of the terms set out by Capital One Canada:
The question is, why misrepresent it as a limit, when it’s really just a threshold, after which cardholders get charged a hefty penalty fee.
Bottom Line: If you want to avoid getting hit with overlimit fees, don’t go over your credit limit. To avoid doing so, set-up mobile alerts. You’ll get a text or email message when you come within a certain percentage of your limit.
6. How Not To Do A Balance Transfer
So you transferred balances to a credit card that you’re also using as your primary rewards card for new pruchases. Guess what, you may be paying more interest than you think.
When you have multiple balances at different rates on one credit card, your monthly payment will not be applied against the balance with the highest interest rate. It will get alloted proportionately, based on the size of each respective balance.
Say you sign-up for a new rewards credit card that comes with a promotional balance transfer offer of .99% for 9 months. You transfer $5,000 of credit card balance at the promotional rate. You then go on to spend $500 that month on your new credit card. So now the $5,000 promo balance represents 90% of your total balance, and your new purchase balance represents 10%.
You then make a $500 monthly payment. However, $450 of your payment (90%) will be applied against your .99% balance, and only $50 (10%) will be applied against your new $500 balance. Now the issuer will be charging you 19.99% interest on the remainder of the $450 new purchase balance!
Here’s the new rule legislated by the Ministry of Finance:
Bottom Line: Always keep your balance transfer credit cards separate from your purchase credit cards. Don’t transfer a balance to a rewards credit card you intend to make purchases with. Get a specialty balance transfer credit card instead, and ONLY use it for balance transfers, never for purchases or cash advances.
7. Retroactive Point Deflation
This one is the anti-loyalty, loyalty play. Devaluing points, by increasing redemption costs on your existing points balance.
Imagine you’re collecting rewards for that new trip that costs 15,000 points. You’ve been collecting dilligently for 2.5 years, and have finally reached your goal. All of a sudden, the rewards program declares that it now costs 18,000 points to redeem for the same trip! The points you’ve already saved up for, just became worth 20% less.
It’s one thing for rewards programs to adjust point values of future rewards. We get the fact that programs costs change, and flexibility is required. However, it’s quite another thing to adjust the value of rewards you’ve already earned and diligently saved up for.
Here’s the language from the Scene contract:
It clearly states Scene can change the terms of “any rewards in any respect…even though changes may affect the value of Scene Points already accumulated.”
Bottom Line: Use cash back credit cards, or spend your rewards points as soon as you can. Don’t let a huge sum of points or miles accumulate in your rewards bank – rarely have points appreciated in value!
8. Credit Insurance, With No Balance
Most people who get credit card balance protection insurance assume they only get charged when they actually carry a balance month to month.
The truth is, whether or not you pay down the entirety of your credit card statement at the end of every month, you’re going to be charged as much as 1.2% of your monthly spend (not revolving balance). That’s the equivalent of 14.4% interest each and every year on your credit card spend (not revolving balance), despite the fact that you’re diligently paying down your bill every month.
Here’s prrof of what we’re talking about, taken from WalMart’s contract terms:
It clearly states your balance insurance will be calculated based on the balance “at the time the statement prints”. But who pays down their balance before they receive their statement? No one. So effectively, all of your credit card spend is charged a balance protection fee. So all that time you thought you were avoiding interest by payind down your credit card bill every month, you were actually paying 10% to 15% in effective interest through balance protection fees!
Bottom Line: Don’t get balance insurance. It almost never pays, especially if you pay down your balance every month. Even if you carry a balance, check your life and disability insurance first, you’re likely already covered.
Credit cards really can be effective payment and lending instruments. You just have to read the fine print and play by the rules. Of course credit card companies make it extremely difficult to know the rules. That said, once you understand them, you’ll be able to take advantage of the best credit cards including 0% intro rates, balance transfers, grace periods, and huge rewards. Just avoid the landmines credit card issuers have laid at your feet