5 Gotchas Credit Card Companies Don’t Want You to Know About

While credit cards, used the right way, can offer tremendous benefits, they also come with some very serious “gotchas.” And these traps are not well publicized by many credit card companies. I know of people that have been burned by some of these traps, so here is a lost of 10 potential credit card traps you should watch out for.

1. Universal Default Interest Rates: Credit card agreements provide that if you default by, for example, making a payment late, they can raise the interest rate on your cards. Called a universal default, these interest rates can be as high as 30% or more. When applying for a credit card, be sure to note what the universal default rate is. More importantly, do everything in your power not to default on a credit card loan.
3. Over Limit Fees: Almost all credit cards come with a predefined credit limit. Many believe that if you’ve reached that limit, the credit card companies won’t authorize your card when you go to use. But it turns out that many will approve the purchase, but then tack on an over limit fee on your next bill. The amount of the fee varies from one card to the next, and the fee can also vary depending on the amount of your credit limit. Fees as high as $39 are not uncommon, which can be more than the amount by which you exceeded your credit limit in the first place.
4. Late Fees: In addition to running the risk of being subject to universal default rates, paying a credit card may also subject you to late payment fees. Fees as high as $39 are not uncommon, depending on the amount of the outstanding balance. And if the late fee sends you above your credit limit, the card company may hit you with an over limit fee, too.
5. Introductory Interest Rates: Many cards come with introductory interest rates as low as 0% on balance transfers or on purchases. These can be great offers that save you a lot of money on interest you’d otherwise pay. But remember that the introductory period does not last forever. Eventually the 0% deal will end, and you’ll start paying whatever interest rate you have on the card. So when you take advantage of a 0% introductory offer, make sure you can pay off the balance before the rate resets, or at least check what interest rate will apply to make sure it isn’t too high.
6. Application of Your Payment to the Outstanding Balance: This is perhaps the biggest gotcha around. When you take advantage of a 0% introductory offer, you may have other balances on your card that are subject to interest charges. For example, you may take advantage of a 0% balance transfer offer, but then use the card for purchases, too. If purchases are not also at 0%, you’ll have two different balances on your card, the balance transfer at 0% and the purchases at whatever interest rate the card charges.

Here’s the gotcha. When you make payments on the card, the issuer applies the principle portion of the payment to the balance with the lowest interest rate. That means you’ll have to pay off your balance transfer entirely before any of your payments will be applied to the purchase balance. Legislation has been introduced in Congress that would eliminate this practice. But until such credit card legislation is signed into law, you need to be careful not to use balance transfer cards for everyday purchases.

Credit cards can offer some great financial rewards. But just remember to read the fine print and use them with care.