In the world of finance, there's no such thing as "free credit." If you think otherwise, just read the fine print on your statement the next time you're paying your credit card charges. It's fairly easy to estimate the amount of finance charges you'll have by using a finance charge calculator. Besides common finance charges you'll have to pay for having outstanding debts on your credit record, you may also notice some hidden charges. Even a "no annual fee" credit card comes with a whole host of hidden finance charges that can more than make up for the cost of an annual fee with other card issuers.
Credit card companies are legally obligated to inform customers of any interest-rate changes as well as any customer actions that can lead to finance charges and/or higher rates. The problem is that this information is often buried in the small-type legalese copy that is mailed along with a new credit card.
We've all been warned repeatedly not to sign any document before reading it, but many of us still don't read the small print in our credit card agreements. Whether that's because we shopped around for the best offer or because there are few things in life as boring as legal copy about credit card finance charges, the end result is the same: We're on the hook for whatever terms and conditions the credit card company decides to impose.
Unfortunately, ignorance about credit card finance charges is not bliss. In fact, ignorance can ruin a strong credit rating — or further weaken a less-than-stellar one. Fortunately, there are some common "hidden" credit card charges that even folks with high-risk credit scores can avoid with a little foresight:
Late-payment finance charges. You probably know what day your payment is due each month, but do you know what time of day it's due? That's right — credit card companies impose a deadline down to the very minute. If your payment is due at 2:00 pm but the mailman doesn't arrive until 2:01 pm, your payment is late, and the company can dock you a late-payment fee of up to $40. To avoid this finance charge, pay your bill a week before it's due.
Interest-rate hikes on ANY late payments. Check the fine print in your credit card terms and conditions. Many credit card companies reserve the right to raise your interest rate if you make a late payment to other creditors, not just to them. The theory is that if you're late on other payments, you're a higher credit risk. The truth is that this is just another revenue stream for credit card issuers. The solution? Pay all your bills on time.
Un-"fixed" rates. Even if you've been promised a "fixed" interest rate for a credit card, the credit card company can change it at any time, provided it gives you 15 days' notice of the rate increase. Some consumers have been able to talk a customer service representative into returning to the lower rate, but that tactic works best for loyal, polite customers who pay their bills on time.
Balance transfer fees. Moving a large balance from a high-interest card to a lower-interest card seems like a no-brainer, but beware of the fine print: The lower-interest card can charge you a transfer fee of 2-4% right off the bat, and the low interest rate may be available for a very limited time, after which you may find yourself back in the high-interest neighborhood. Read the new card's terms and conditions carefully, and use a finance charge calculator to see whether your short-term gain could lead to long-term pain.
NON-usage charges. Think it's outrageous when you're charged $2 for withdrawing your own money from ATMs at other banks? Consider this: Even "no annual fee" credit cards can charge you for NOT using your card for an extended period of time. To avoid inactivity finance charges of up to $15, use your credit card for small, easily-paid purchases every three months or so.
Like we said, there's no such thing as "free credit." However, if you read the fine print on credit card agreements, pay at least the minimum amount due — on time, every time — and stay within your means [link to "Use Credit Wisely"], you can avoid many of the hidden credit card charges that can otherwise wreak havoc on your account, not to mention your credit history.
