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Common Credit Card Traps

Credit card traps are just that: policies that trap unwary consumers into spending more than they have to, to use a credit card. Unfortunately, many people fail to shop around for the best credit terms. They may also not be aware of costly policy changes made by credit card issuers years after they open an account. Even if people are not experiencing financial distress, they may be paying more than necessary to borrow money.

Skip-a-month offers are a common credit card trap. They are used during the December holiday season when people have extra expenses for gifts and travel and may have more difficulty paying their credit card bills. A credit card issuer provides a special bill insert or message on cardholders' statements indicating that they are allowed, and in fact encouraged, to skip the next month's payment without penalty. Of course, there is "no free lunch." Interest charges continue to accrue when a cardholder skips a payment.

Cash advances are another trap for the unwary. Basically, they are cash loans made with a credit card. In other words, instead of using a credit card to make a purchase, a cardholder uses it to receive a cash loan. Often cash advances are made with "convenience checks" that are sent to cardholders. These are checks tied to a person's credit card account. If a cardholder uses a check, the amount of the check is posted to their credit card account as a cash advance and cash advance policies apply.

Cash advances are an expensive way to borrow money. There are four reasons for this: 1. there is generally no grace period. 2. most credit card companies charge transaction fees. 3. the annual percentage rate (APR) for cash advances is often higher - sometimes much higher - than for purchases and 4. to add further insult to injury, some creditors use a different balance calculation method for interest on cash advances than they do for purchases.

The cash advance example below comes from the book, The Ultimate Credit Handbook by Gerri Detweiler. It illustrates how costly cash advances can be. A cardholder receives a $500 credit card advance and pays the money back 25 days later when the bill arrives. The credit card issuer charges 18% interest from the date of the advance because there is no grace period. In addition, there is a 2.5% transaction fee which comes to $12.50 ($500 x .025 = $12.50). The interest charged is about $6.00. This, plus the $12.50, amounts to an APR of 44% for the short time period (less than a month) of the loan.
A type of credit card where consumers need to check out policies and fees carefully is the secured credit card. While secured cards can be very helpful to some people, they have also been used as the basis for deceptive marketing scams that appeal to desperate borrowers who find it difficult to obtain credit. Secured credit cards are bank credit cards backed by money that cardholders deposit and keep in a bank account. The account serves as collateral for the credit card. If a cardholder doesn't pay a credit card bill, money in his or her account can be used by the credit card issuer to cover the debt.

Secured credit cards are a good way to establish credit if you have no history or to re-establish credit if you've had prior credit problems. However, they are generally an expensive way to borrow money, with higher fees and interest rates than most unsecured credit cards. For this reason, secured credit cards should be thought of as a "stepping stone" to an unsecured credit card. After a cardholder has made timely payments for 12 to 18 months on a secured card, he or she may be able to qualify for a lower-cost unsecured credit card. The secured credit card can then be canceled and the cardholder's deposit returned.