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Banks behaving badly
Low teaser rates sound great, until you find out what you're really paying -- if you find out.
October 19, 2005: 12:17 PM EDT
By Carolyn Bigda, MONEY Magazine
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NEW YORK (MONEY Magazine) - Zero percent interest for the next six months, or even a year, on all balance transfers. No annual fees. Rewards points for everyday purchases. Choose airline tickets, hotel stays, car rentals, a variety of great brand-name products or just get cash back.

What red-blooded American credit-card holder could resist such a deal?

Well, if you're smart, maybe you.

Tantalizing offers like these from your bank or credit-card issuer are increasingly filled with traps that can pile on unexpected fees or trigger punitive interest rates, some as high as 35 percent.

True, the details are spelled out in the fine print of promotions and cardholder agreements. But, says Curtis Arnold of, "You have to be incredibly diligent to avoid the tripwire."

The strategies that follow will help make sure you don't get caught.

Trap No. 1: The old bait and switch

You're tempted by one of the many low-rate or zero-percent card offers you get in the mail claiming you're pre-approved for the deal. But the fine print often contains qualifying language that can result in your getting a higher rate than advertised.

If you do land the stated rate, you'll often find that it applies only to balance transfers, not new purchases. Your monthly payments, however, will be applied first to the low-rate balance transfer, helping the new, higher-rate debt to grow.

And if you're late with just one payment, the issuer may well boost your rate on the whole amount outstanding, even though the low rate was supposed to be in effect for six to 12 months.

What to do "The cardinal rule of balance transfers is to take the card transferred to and put it in a dark place where you'll never be tempted to use it again," says Arnold. Before you apply for a low-rate deal, make sure you understand the terms in the disclosure box and read the fine print to see what can trip you up.

Trap No. 2: One strike and you're up

You probably know that late payments can prompt your card issuer to increase your interest rate, even if you're a first-time offender. And you may know that some issuers will raise your rate if you're late paying a bill to a different company altogether -- a policy called universal default that is practiced by 45 percent of banks nationwide, according to Consumer Action.

But you may not realize that a card company with a universal default policy can also hike your rate because you're shopping for a deal on a mortgage or car loan (too many inquiries on your credit report) or because you've opened a new credit-card account (too much available credit). What's worse, banks aren't required to notify you in advance of the rate change or explain the reason.

What to do Call and ask your issuer whether it has a universal default policy. If so, consider switching cards. Check your monthly statements carefully to make sure a rate hike hasn't slipped past you, and read all notices that you're sent.

Some banks, such as Citibank, now give a two-week warning and let you pay off your balance at the lower rate. The catch: The account will be closed, so you can't make additional charges on it. If your rate does jump, ask the issuer to lower it. Tell the rep that other banks have made you better offers, which is undoubtedly true.

Trap No. 3: Twice is not so nice

If you carry an occasional balance on your credit card, you may get hit with higher than expected finance charges if your issuer uses a two-cycle billing system vs. the standard one-month cycle. That's because carrying a balance wipes out the grace period on new purchases, and in a two-cycle billing period, the issuer can impose interest retroactively.

Say you charge a $1,500 laptop on Dec. 15 and can't pay the full balance when you get your bill in January. Under double-cycle billing, you'd be hit with interest based on your average daily balance in January and December, resulting in 50 percent higher finance charges than if you'd been charged for January alone.

What to do Check your cardholder agreement to see if you're subject to two-cycle billing. If you are, and you carry a balance from time to time, switch to an issuer that bills on a single cycle.

Trap No. 4: The rude courtesy service

It sounds like a nice gesture: Your bank automatically covers you if you overdraw your account, saving you the humiliation of a bounced check or a declined debit card. What your bank doesn't spell out is the hefty cost of this courtesy service, which runs up to $35 per transaction.

What to do Sign up for overdraft protection linked to a savings account or credit line instead of relying on the default service. Cost: about $7 per transaction. Better yet, stop living so close to the edge. The easiest way to avoid overdraft fees? Don't spend more than you have.


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