Sunday, October 12, 2008

Credit Card Fine Print

Credit card offers are well known for having fine print that outlines terms and conditions in language that can be difficult for the average consumer to understand. Unfortunately, it is necessary to be aware of what your credit card offer's fine print explains, because when you sign up for a credit card, then you assume an understanding of what is included in the terms and conditions -- whether you understand them or not.

The fine print must be listed in a credit card offer for legal reasons. The credit card industry includes some interesting clauses in the terms and conditions. And, this trend has increased over recent years, with the advantage going to the credit card industry. Many consumer advocates argue that a rising share of the card industry's revenues come from deceptive tactics hidden in the fine print.

Although certain people may consider some of the clauses sneaky and unfair, they are perfectly legal as long as the card issuer discloses their rights and intents in the terms and conditions. And, by signing on the dotted line, you assume an understanding of what is entailed in the terms and conditions. It is necessary for you to become an educated consumer who fully understands what is included in the terms and conditions of any credit card offer that you apply for.

For starters, you should take a look at the offer's Schumer Box, an easy-to-read table that includes fees, rates, and penalty fines. The Schumer Box was born in March 2004 in response to legislation known as the Federal Truth in Lending Act that requires credit card issuers to include the costs of credit cards in all solicitations and applications and to display them in an easy-to-read format. The Schumer Box format is named for Representative Charles Schumer who spearheaded the legislation in Congress.

The Schumer Box includes:

  • Annual fee (if applicable)
  • Annual percentage rate for purchases (APR)
  • Other APRs (for balance transfers, cash advances, default APRs)
  • Grace periods for purchases
  • Finance calculation method
  • Other transaction fees (for cash advances, credit card balance transfers, late payments, and exceeding the credit limit)

Thanks to the standard format provided by the Schumer Box, comparison shopping for credit cards is easier than ever. Everything in the Schumer Box is need-to-know information for every credit card user.

But there are many more items not included in the box that are also helpful for the cardholder to be aware of. By law these items appear in the terms and conditions of your credit card. While they are not critical to know, they can help you avoid getting into trouble later because you were unaware of certain items.

Some phrases to look out for in the terms and conditions of the contract include:

  • "...if the card holder is reported as delinquent on an account with any other creditor, we may increase the APRs on your account up to the maximum Default APR." This is what is known as the universal default clause and acts as a way for the issuer to raise the cardholder's APR for delinquencies on other accounts.
  • "Disputes relating to the account are subject to binding arbitration." The inclusion of this phrase in the terms and conditions protects the credit card issuer from lawsuits and class action suits. If the cardholder has any problem or dispute regarding their account, they are limited to an arbitration hearing. The arbitrator is chosen and hired by the card issuer, and the cardholder's legal options are severely restricted. Most credit card offers now include this provision.
  • "Balance transfer fees are added to the purchase balance and are subject to the APR for purchases." This phrase states that the fees you pay for a credit card balance transfer are added to your any balances from purchase activity and you are charged interest on this combined total.
  • "The Introductory APR does not apply to Bank and ATM Cash Advances." Generally, a higher cash advance APR is applied to these balances.

Credit cards that are described as "fixed-rate" contain information in the terms and conditions explaining that going over the limit can automatically change the rules to your account by significantly boosting your interest rate.

When a card is said to use double-billing cycles (or two-cycle billing), this means that the interest is calculated on the balance you hold over the two prior months, as opposed to being calculated on the average daily balance for one month. As a result, consumers end up paying more interest or finance charges on credit cards that use double-billing cycles.

Meanwhile, although fees are usually defined in the Schumer Box, they are generally easy to read and compare to other offers. Fees can add up quickly, so it is very important to know what types of fees are associated with each card offer you are considering and the amount of each fee.

While reading credit card fine print disclosures is not most consumers' idea of a good time, it can save serious aggravation and money down the line. So, be an informed consumer and make sure you know what's involved before completing an application for a new credit card.

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