It would be basically idiot-proof if the terms of a loan is simply $14 interest on every $100. There will be less disgruntled customers and the issuers will have to spend less money on dispute resolution and customer service training. The sad part is that life will never be this easy. Adding unforeseen hazardous charges and penalty fees are almost a necessary requirement for any credit card company to issue a new card. These are 4 traps that can sink it’s teeth in you when you least expected.
Decreasing grace periods
The period of time between your billing cycle end date and the payment due date is the grace period. This is the period where you enjoy the use of money that don’t belong to you without having to pay an interest to the borrower. You don’t have to worry about the profitability of the card issuers as they will be making a pile from transaction fees charged to merchants. That is a topic for another day. Grace periods are the most useful form of benefit to cardholders with basic needs. You don’t have to carry huge amounts of cash around. You can swipe your way into restaurants and fashion boutiques. Then the bank provides a free service to consolidate your bills which you will only have to pay off at the end of the payment due date. That all sounds great, provided you know exactly when the date fall.
The first thing that we must acknowledge is that issuers do not owe it to consumers on fixing a 30-day standard period. It just happens that most employees receive their salaries on a monthly basis and it makes common sense to match grace periods with pay periods. With mass adaptation to this reasoning, a generic mindset started to imprint itself into the minds of consumers that a 30-day grace is an industry standard. Maybe it was in the past. But it is no longer so. Grace periods are shrinking by as much as one third.
There is nothing wrong on the lender’s part by decreasing this period from 30 to 20 days. The problem is that most people are so used to 30 days that they tend to assume that is so with every card. By the time they make a repayment which they thought was timely, it will already be too late as they have incurred late charges. And you should know that disputes with banks can be a messy frustrating affair that give you the run-around and leaves you hanging out to dry.
So the best way to avoid this trap is to ask about it in the first place. There are generally 3 types of grace periods. Typical grace, full grace and no grace. Read the fine prints to ensure you understand the payment terms. And remember to always make full payments by the due date.
A big tip that might help you is that online payments are usually clocked in the same day. So you do not have to wait days to top up your balances like in the case of waiting for a check to clear. Transfers between your own accounts also tend to be immediate. This means that if you have a current or savings account with the same bank, you can make a transfer of funds online from your account to the outstanding credit card account as payment immediately. If you are not comfortable paying your bills at a self-help terminal, you can actually make a cash deposit into your current account and get online to transfer funds to the credit card account as payment. You should check up on the terms and technology used by your lender to see if this ia viable before attempting it.
Tricky cash advance fees
For cards with a cash advance feature, users often assume that interest fees on it will be the same as the credit stored in a card. This is not the case. A rational way to look at it is that when you draw down a chunk of cash, you are taking it from the cash vault of the lender, cash that they use to profit from lending to consumers. When you take a bite at that cash pile, lenders incur an opportunity loss as they could have used the money to credit into a borrower’s account. The costs you will incur is usually a flat fee in percentage terms with a minimum charge, whichever is higher. For example, 4% on the amount, at a minimum of $20. On top of that, there might be a processing or administrative fee.
With this information, you can probably see that you could be over generous if you take up small cash advances. Because when we sum up the minimum charges with the total finance charges for 12 months, you could easily be paying over 100% in fees on an annual basis. Even though the real dollar amount can be small, the percentage points involved does not add up to savvy money management.
Trailing interest
Trailing or residual interest is a finance charge that many consumers affectionately refer to as a phantom charge. It comes into the picture when you carry a balance for more than 2 months. It runs right up to the day your payment is actually received. It is a weird lending phenomenon where you will see that you have no outstanding balances, and yet after which, incur more charges. The charge is based on the time between the close of the billing cycle and the due date. Meaning the previous balance was the cause of this charge and it was accrued after the statement showing zero balance was generated. You don’t have to smash your head against the wall if you are unable to wrap your mind around this. Most people are unable to as well. And the creative people employed to come up with these fancy stuff are surely worth their million-dollar bonuses.
Your defense against this is to call up your issuer when fully paying up your obligations and ask for a clear full payoff amount and a specific date that the payment has to be made. You then owe it to yourself to meet those requirements.