How
to Spot a Credit-Card Rip-Off
by Donna Rosato
August 22,
2008
Issuers
are taking heat for hidden charges, but there's already an
easy way to tell if a new card offer is a deal or not. It's
the "Schumer Box," a table in every application
named for Sen. Charles Schumer, D-NY who sponsored the 1988
law that requires it.
| 1 |
An
APR of 11% or Less on Purchases |
The
annual percentage rate (APR), or interest you pay on balances,
must appear in big type. You aren't guaranteed this APR. It
will depend on your credit history.
The
box will also say whether there's an introductory rate and
how long it'll last. Today's average APR is 11.32%; with a
credit score of 720, you should get 10% or less.
Note:
Most APRs are variable, meaning they change with the prime
rate.
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| 2 |
Low
Rates on Other Loans |
Look
next for rates on cash advances and balance transfers if you'll
use those features. The average APR on cash advances is 21.65%;
expect a fee of 2% to 4% too (these charges usually appear
in or under the box).
If
you're transferring a balance, look for a card that has a 0%
APR for at least a year. And ask to have any fee waived (43%
of issuers will do this for new customers, reports education
and advocacy group Consumer Action).
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| 3 |
Forgiving
Penalty Terms |
In
the same section of the Schumer Box, the issuer must also tell
you what the penalty rate, or "default rate," will
be if, for example, you pay late or go over your limit. (It
can shoot up above 30%.)
The
issuer also must disclose what triggers this rate, next to
an asterisk below the box. Look for a card that allows at least
one or two late payments before the default APR kicks in.
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| 4 |
Finance
Charges Based on Average Daily Balance |
According
to a 2006 Government Accountability Office report, about a
third of issuers calculate your finance charges using an average
of your current and previous months' balances. This is usually
listed in the box as "two-cycle average daily balance" or "two-cycle
billing" and means you may pay interest on debt you've
already paid off.
For
example, if you charge $500 in the August cycle and make an
on-time payment of $450, under two-cycle billing, you'd be
charged interest on the full $500 in September vs. only the
$50 owed.
If
your balance fluctuates, opt instead for a card that uses the "average
daily balance," which is one-cycle billing. Also, look
for the phrase "adjusted balance," which means the
issuer subtracts any payment from your beginning balance.
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The
Schumer Box will tell you what you'll pay each year for the
privilege of being a cardholder. About two-thirds of cards
don't charge an annual fee, according to a 2007 survey by Consumer
Action.
The
ones that do are typically airline or cashback rewards cards,
but these also tend to come with high interest rates. Pay a
fee only if you'll earn enough rewards to cover it and you
don't carry a balance.
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What's
Not in the Box
Unfortunately,
not everything you need to know is in the Schumer Box.
Some key information is buried in the cardholder's agreement—the
fine print you receive only after you've been approved.
Certain
terms are red flags. The phrase "any time for any
reason" means that the issuer can hike your rate
at will even if you've never been late with your bill.
And statements like "defaults to other creditors" or "delinquent
on an account with any other creditors" mean that
the card company practices universal default and can
raise your rate if you make a late payment on any loan
anywhere.
The
Federal Reserve has put forth proposals that would eliminate
these practices. In the meantime, however, you should
call customer service before you apply to find out whether
the card has these sneaky terms, advises Curtis Arnold,
author of "How You Can Profit from Credit Cards" and
founder of CardRatings.com. |
The
opinions and views expressed in this publication are for general
information only and are not necessarily those of Mutual of America
Life Insurance Company.
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