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Read the Fine Print On Credit Cards

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Credit card companies are feeling the credit crunch and tightening the screws...

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Someone just sent me this ad from Discover Card (DFS) offering 0% interest on balance transfers. In tiny print at the bottom of the page is a link explaining the "*".

Click to enlarge

The 0% APR on the balance transfer is good to February (I captured the image last month when it said December), however, that 0% balance transfer costs you 3% up front. Pay the bill off in a month and you just paid 36% annualized interest to transfer the balance. On a balance of \$500 the \$39 over-limit fee amounts to 7.8% of your available credit, which is pretty steep and gives the processor an incentive to allow you to go over your limit and collect the hefty fee.

2-Cycle Billing Defined

Many consumers are unfamiliar with "2-cycle billing." Dr. Don from Bankrate.com explains how 2-cycle billing works. "It's a way for credit card companies to effectively get rid of the grace period when a card-holder moves from paying off his bill every month to running a balance."

Those who sometimes carry a balance and sometimes do not really get clobbered under a 2-cycle billing scheme, as do those who have infrequent large balances, as Truth About Credit Cards explains.

Two-Cycle Average Daily Balance is a less common APR computation method, though it's used widely by Discover card and other card issuers. This is typically the most expensive way of calculating APR because it takes into account two months of your average daily balance.

Say you have an average daily balance of \$1500 during your previous billing cycle and \$500 during your current billing cycle. Though you paid off a good chunk of your previous credit card balance, the two-cycle average daily balance would be calculated as \$1000 (the sum of the last two months average daily balance, \$2000, divided by 2), not the \$500 balance you currently carry.

This would effectively double the finance charge, making it less attractive to carry a high balance on your credit card(s) that employs the two-cycle average daily balance computation method.

Since Discover pays you 1% per month for all transactions (higher for some transactions) you can come out on top if you meticulously pay your bills on time. Let a balance ride and you quickly lose the benefit of the kickbacks.

What About Complicated Pricing?

The Chicago Tribune is writing Complex pricing of credit cards should be simplified. The article identify some alarming facts about the rights credit card companies have if you carry a balance.

Pop quiz: what's the interest rate on the credit cards you're carrying? How about the default rate? Do you know what constitutes an event of default? What will trigger a penalty fee or surcharge? How much are those fees? If you're like most Americans, you probably cannot answer many or all of these questions.

Consider this: It's entirely possible that under a common cardholder agreement provision called a universal cross-default clause that your dispute with the cable company over lousy service constitutes an event of default on your credit card. The default bumps your interest rate up to 32 percent, which is applied retroactively to your existing balance and (under another common practice called "two-cycle billing") to the balance you paid off last month.

Credit cards have a complicated price structure. Cards have multiple price points -- annual fees, merchant fees, interest (at several different rates), and assorted back-end fees, such as late fees, over-limit fees and currency conversion fees. This pricing structure makes it virtually impossible to determine the potential costs of carrying a balance.

Credit cards' complex, non-transparent pricing structure also invites abusive fees and billing practices like late fees that do not correlate with either the balance or time a payment is late, universal cross-default and two-cycle billing. If you are among the nearly two-thirds of Americans who do not consistently pay off your card bills in full and on time, then you've probably been hit with some combination of these fees.

The Byzantine complexity of credit card pricing structures makes it impossible for people to possibly use credit cards intelligently and responsibly.

The responsible way to use credit cards is to pay off the entire bill every month, but its getting harder and harder to pay bills on time. Credit card companies are feeling the credit crunch and tightening the screws, enforcing rules that have always existed, but until now they haven't had the need to use.

Although there is talk of Congress passing legislation to increase transparency of credit card pricing and protect consumer rights, don't count on legislation to handle your personal finances. Pay your bills on time and allow yourself to ignore the fine print.
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