Credit card companies claim they want to help you, by giving you access to funds for the things you want and rewarding you for good spending habits—and to an extent, this is true. But the credit card industry is a profitable one: It makes money by charging merchant fees, selling aggregated customer data, and, most lucratively, collecting customer fees and interest. The more debt you revolve, the more money they make.
You can beat them at this game—you just need to know their tactics. Here are five tricks to look out for.
1. THEY CHARGE YOU DEFERRED INTEREST.
A “0 percent introductory APR” offer—a common perk credit card companies use to get you to sign up—means you will not be charged interest on your balance for a certain amount of time. Once that introductory period expires, the card’s standard interest rate kicks in and you will be responsible for paying interest on whatever balance is left on the card.
Deferred interest credit cards are kind of like the sly cousin of 0 percent introductory APR cards. With deferred interest, you also have an introductory period during which you don't have to pay interest. However, if you don’t pay off your card completely at the end of the promotional period (even if you have just $1 left), you will owe interest retroactively on all purchases you made during that time. For example, let's say you open a six-month deferred interest card, rack up $1000 in purchases, and then accidentally leave a remaining balance of $10 on the card. You will owe interest on the entire $1000 balance.
The deferred interest details are often buried in the terms and conditions, so consumers are surprised to learn how much they owe after the introductory period. Worse, this often traps consumers into a debt cycle: If they can’t pay off the balance once the interest charges are added, they have to keep revolving it, paying even more in interest each month.
This isn't to say that signing up for a deferred interest card is a terrible idea. The key in making it work in your favor is to pay the balance off in full by the end of the promo period. If you don’t have the cash on hand, though, you’re taking a big risk.
2. THEY AUTOMATICALLY INCREASE YOUR CREDIT LIMIT.
Getting a letter or email from your credit card company saying you are now allowed to spend thousands of dollars more can feel like you've hit the jackpot. But the credit card companies are smart—they don't give increases to delinquent customers who don't pay; they offer them to paying customers who may revolve a small balance. The purpose of this new spending limit is, therefore, to encourage you to spend more and revolve a higher balance, therein making the credit card company more money.
Also, many credit cards do let you spend more than your limit, they just charge you a fee when you do. You might think that all attempted purchases over your credit limit will be declined, but in many cases they can in fact be processed and you will be slapped with an additional $35 over-limit fee. The remedy for all of this, of course, is to know your account's terms and to keep your spending to what you can afford, even if your limit increases.
3. THEY ADVERTISE DEBT AS “FLEXIBILITY.”
If you use your credit card responsibly, credit card companies don’t make as much money from you; they want you to carry a balance. So to put a positive spin on it, they make it seem like debt is a benefit they offer. American Express, for example, gives cardholders a "flexible credit card payment option," defined as “the option to carry a balance each month with interest.” In other words, revolving your debt. It’s certainly an option, but not one that's a very good option for the consumer.
4. THEY RAISE YOUR INTEREST RATE.
Credit card companies are allowed to increase your rate for a number of reasons. Fortunately, the Credit CARD (Credit Card Accountability Responsibility and Disclosure) Act of 2009 keeps them from increasing your rate on an existing balance—unless you miss your payments. If you’re late a couple of times, they’re allowed to charge a penalty APR that can indeed apply to your existing balance and any new purchases.
The CARD Act does requires the credit card companies to warn you of the new penalty rate 45 days in advance and also to reconsider your rate after you've made six consecutive on-time monthly payments.
5. THEY CHARGE HIDDEN FEES.
We really can't underline enough how important it is for you to read the fine print on your credit card account. In addition to hiking interest rates, credit card companies can gouge you with hidden fees, so be on the lookout for the following when reading through your terms:
Balance transfer fees
Foreign transaction fees
Also, bear in mind that many rewards cards charge annual fees but waive them the first year.