You may have heard that you should read your credit card agreement carefully to avoid unpleasant surprises down the road. But let’s just assume you haven’t had the time, or the spare mental energy, to plow through page after page of small print.
I’ll try to help. I’ve plowed through hundreds of these agreements over the years, and while there’s no one-size-fits-all method for making sense of them, you can at least keep an eye out for critical parts of these arcane, of-the-lawyers, by-the-lawyers, for-the-lawyers documents.
It’s probably unfamiliar territory. Most people sign up for a new card because of the rewards program, the interest rate or the balance transfer deal. Beyond that, the terms and conditions are a mystery.
A secret-shopper survey by Maritz Research indicates that many people are in the dark about fundamental aspects of their card agreement. What’s more, banks often do a poor job of explaining their products. After conducting about 400 branch visits and 370 shopping calls, the research company found that a third of bank customers had a limited understanding of credit card offerings — even after speaking with a representative.
“The results of our study indicate that banks and credit card providers have some work ahead of them to protect customers from confusing information,” said a statement by Michael Matza, the company’s senior strategic consulting director of the Financial Services Research Group.
What to look for
When you’re looking for a card, you can check out the agreement online before applying, either on the issuer’s website or the Consumer Financial Protection Bureau’s database of card agreements. Make sure you understand fundamentals such as the annual percentage rate, penalty rates and fees for paying late or taking out a cash advance. The CFPB published an outline of the general areas that card agreements cover.
Beyond that, here are a few provisions you should look for:
- Variable rates. That rate in bold print that you signed up for is not forever. More than 70 percent of card agreements have variable interest rates that move in step with banks’ benchmark prime rate. Once the U.S. central bank starts raising rates again, probably in mid-2015, the rate on your entire balance will start rising. That could be a shock after eight years without a rate increase. The Federal Reserve expects to increase rates by 4 percentage points in the next few years. Under that scenario, carrying a $5,000 balance will cost $200 more a year in interest per year.
- Arbitration requirement. Binding arbitration means you agree not to take the card issuer to court if you have a dispute. Several of the big banks have dropped arbitration requirements. Others have an opt-out provision that expires within a month or two of using the card for the first time. Taking advantage of this escape hatch doesn’t mean that you and your bank can’t choose arbitration later if you wind up in a dispute. It just means you won’t be required to.
- Credit protection. This may go by other names such as “payment protection.” Whatever the name, the key thing to remember is that it’s voluntary. If you get some pitch to shield your family from financial strain, should you lose your job or become disabled, don’t bite. Most large issuers have dropped these expensive insurance policies after being smacked with fines by regulators. But small lenders that aren’t supervised as closely as their larger peers still offer the lucrative — for them — protection programs. Usually the terms are in a separate document that you will have to dig up if you want to discover how little you will benefit, in the unlikely event you make a successful claim. Spare yourself the trouble and exercise your volition to say “no thanks.”
- Monthly maintenance fee. These fees frequently show up on subprime cards. Some customers may feel lucky to get a card at all and overlook the added cost. Some issuers waive the fee for the first year, so the fee creeps in stealthily after you’ve let down your guard. The fee may also be charged on the “purchases” part of your statement, making it harder to detect.
In Maritz’s secret shopper study, bank representatives often pushed to close the sale instead of taking the time to explain financial fine points. That is all the more reason to buckle down and read the fine print yourself.