Guest blogger Kalen Smith holds an MBA in finance. He discusses
financial topics such as investing, credit cards and economic policy on the Money Crashers personal finance blog.
Credit card companies know what features their customers are
looking for and naturally use the information to make their terms sound as
compelling as possible. For example, they may capitalize on existing
legislation designed to protect consumers, and they definitely make liberal use
of “the fine print” to qualify their glorious-sounding offers.
In other words, many of their policies aren’t as great as
they make them out to be, so don’t be fooled. Know what you’re really getting before you sign up. After all, the
last thing you want to do is make an important financial decision based on terms that you don’t understand.
Before you purchase a credit card, make sure you fully
understand its terms and conditions, especially when it comes to card offers.
Here are the most common ones that tend to be misleading:
1. No liability on fraudulent purchases
Credit card companies often tout their zero-liability
policies toward unauthorized or fraudulent purchases. At first glance, it may
seem generous to not hold you accountable for unauthorized purchases. However, banks
aren’t likely to point out that the Truth in Lending Act already limits
your liability to $50. In other words, credit card companies are barely going
beyond the call of duty here. In fact, more often than not, they’ll be
compensated in excess of this $50 for the interest and fees they’ll charge you
on your account.
2. Low APR isn’t guaranteed
This is a great promise, until you read the fine print.
First of all, most people won’t qualify for that low rate due to their credit
score or spending history. Also, what many borrowers don’t realize is that
credit card companies tend to reevaluate your credit score on a regular basis.
Case in point: Three years ago, Time
published a story about Katie Groves, a consumer who thought her fees wouldn’t
go up if she paid her bills on time. However, Groves was shocked when her
interest rate was raised from 12 percent to 29.99 percent. When she looked
into the issue, she learned that the card company checked her credit score,
which had dropped, and therefore jacked up her rate.
That practice was prohibited by the Credit CARD Act of 2009, but if you think paying your bills on time is now enough to keep
a low APR, think again. The reality is that after you’ve had a card for a year,
banks can raise your rates whenever they want and for whatever reason, as long as
they give you 45 days’ notice of the change. However, they typically can’t
raise your rates for the first year you have the card unless you’ve made a
major mistake, such as being 60 or more days late with a payment. If that
happens, then banks don’t even have to wait 45 days. That means the best way to
keep your fees from increasing is to never be delinquent on your
bills and to maintain or improve your credit score.
3. No co-signer required
“No co-signer required” is a common selling point
on college student credit cards. What many students don’t realize, however, is
that these credit cards are just highlighting a feature common to all credit
cards. No co-signer is ever required as long as the applicant has sufficient
income and credit and can demonstrate that they have the means to pay back
credit extended to them.
More important, if you don’t have a credit history — which
is common for college students — you will likely need a
co-signer to meet the necessary qualifications to get approved. In other words,
while it’s not required to have a co-signer, it is necessary for many
4. No preset spending limit
American Express tells its customers that they don’t have a
preset spending limit on certain accounts. When they say this, however, they
mean that they regularly review your card’s spending limit for potential
increases, so you may be able to earn a higher limit based on a variety of
factors, including your spending, credit and payment history.
In other words, a credit card that has no preset spending
limit does indeed have a limit on how much you can spend! Make sure you
understand what yours is and how and when your spending limit is reviewed
before signing on with one of these cards.
5. Cardholder rewards
From cash back to miles to free hotel stays, credit card
companies offer a range of rewards to get your business. However, more
often than not, these incentives come with strings attached. Citi and Chase, for
example, offer cash back credit cards that require consumers to make $500 worth
of purchases in the first three months, while other cards may require thousands
of dollars in purchases before they are eligible for cash back.
These cash back offers may work out well for consumers who
spend large amounts, but consumers who don’t will be disappointed, especially
if they don’t read the fine print where most of these “strings” are
revealed. And you need to be careful with travel cards, too. For example, many
miles programs have blackout dates, time limits or limited availability, which
can make it impossible to use your rewards on the dates you wish to travel.
6. Limitations on credit card insurance
Credit card insurance is an optional policy available for
purchase that pays your credit card bills if you are unable to do so — under
certain conditions. But once again, cardholders don’t often review the fine
print on this because these offers are typically made over the phone by a sales
In fact, too many consumers sign up for this insurance
believing that any financial hardship will qualify them to
use it. In reality, only a handful of factors, such as extreme disability or
unemployment, are considered qualifying events. Moreover, even if they become
eligible, this insurance may only relieve them of making minimum payments for a
certain amount of time instead of the entire balance amount. In other words,
many consumers who have purchased credit card insurance will find it worthless
if they actually need it.
Credit card companies need to market their products just
like any other business. But because their products are more complex than most
others, it pays to analyze and understand what you’re really being offered.
Especially in the world of finance, you’ll never get something for nothing and
if that’s how a credit card offer sounds to you, you can bet it’s too good to
be true. Always read the fine print to make sure you’re not being offered empty
promises, and seek to use credit cards and rewards wisely. Oftentimes, a “great
deal” isn’t as glamorous as it appears