Here's a map for dissecting credit card fine print

Kathy Chu, March 2, 2006

DIV>Here's a map for dissecting credit card fine print
Making sense of the fine print on credit card contracts can be as exciting as curling up with the IRS' Form 1040 at tax time.

But doing so — just like doing your taxes — can keep you on top of your finances. Yet only 44% of us read every word of our credit card contracts, according to a 2003 survey.

It's tempting to make paper airplanes out of those dense disclosures. But here's why you should read them first:

If you're shopping for a credit card, the terms tell you how much you're going to pay and what happens if you don't pay on time. If you already have a credit card, you need to stay alert to higher rates or changes in rewards programs.

That's especially true at the start of the year, when many issuers send out revised card-holder agreements. Some issuers are raising the minimum monthly payment required. Others are switching fixed rates to variable rates that rise with short-term interest rates. As of mid-February, 82% of credit cards had variable rates, compared with 64% a year ago, according to, a card-research firm.

Lenders recognize that the credit card language can be intimidating.

"It is a lot of legalese" that banks are required to disclose in the agreements, says Fritz Elmendorf of the Consumer Bankers Association, a trade group. "I don't think anyone's happy with the nature and detail of the disclosures."

Here are some biggies to watch out for:

Interest rates: They can differ and can jump

Increasingly, different interest rates apply to purchases, cash advances and balance transfers. On top of that, there are penalty rates that can kick in if you're an hour late paying your bill or you exceed your credit limit or your credit score drops.

This penalty rate reaches a scorching 40% on some cards offered to people with the poorest credit records and up to 30% on mainstream cards, according to Robert McKinley, CEO of

Keep in mind, too: The rate for cash withdrawn from your card is typically 5 percentage points higher than for purchases. Also, promotions that urge you to transfer debt to another card tend to offer lower rates, but only for a limited period.

Want to pay off the highest-rate balance first? You can't. In their card holder agreements, most issuers state that payments will go toward the lowest-rate balance before making a dent on the higher-rate one. That keeps revolvers — customers who carry a balance — in debt longer.

Banks can lose money on a promotional rate, so they use payments to pay down that balance first, says Fritz Elmendorf of the Consumer Bankers Association.

Consumers should regularly call their bank to seek a lower rate; those who pay on time will likely get it. You can also shop around for a better rate. But opening too many accounts can hurt your credit score.

Fees: It's way too easy to fall into 'late' trap

Pay your bill late, and you'll be charged up to $39 each time. Same for spending beyond your credit limit. It's getting all too easy to fall into the late-payment trap. Most issuers have cut the grace period — during which you can pay your bill in full to avoid finance charges — from 30 days to between 20 and 25 days, says Consumer Action, an advocacy group.Late fees, in turn, can push you over your credit limit.

Also, you could have, say, a March 1 date to pay your balance in full without incurring interest charges, but a later date — say, March 15 — to pay the minimum to avoid late charges. So even if you paid the balance by March 15, you could face interest charges, says Robert Manning, finance professor at Rochester Institute of Technology.

If you make a purchase overseas, issuers charge up to 3% to convert the transaction into U.S. dollars. Cash advances incur a triple whammy: You usually face a 3% fee if you withdraw money from a credit card at an ATM or use a bank convenience check. Then you get hit with a stiff interest rate on the amount withdrawn. Meantime, you're not allowed to pay off that higher-rate balance until you've taken care of the lower-rate balance.

You can lobby your issuer by phone or in writing to have fees reversed. But pay late or go over the limit too many times, and you'll be out of luck.

Contract changes: Warning period only 15 days

Credit card issuers are required only to give you 15 days' written notice before raising rates, slashing rewards or making other changes. You can choose to reject those terms and pay off your balance. But you'll usually have to notify the company in writing.

If you refuse the changes, some issuers will let you pay off your balance on the old terms but won't let you make any new purchases. Others will let you keep the old terms and continue charging on the card until it expires.

Notices of changes are included in monthly statements. But at the start of each year, many card holders are also sent amended agreements that include a host of changes for the following year.

Discover, for instance, notified card holders in January that each time they pay late, their interest rate for purchases will rise 5 percentage points, to a maximum of 28.99%. Lower promotional interest rates would also rise to that higher rate, effective on billing periods that end after April 1, according to Discover.

Card holders can get back in Discover's good graces, but it'll take more than one on-time payment: You must pay on time for nine consecutive billing periods before Discover will consider reducing the rate on the existing balance, the amended card holder agreement says.

Arbitration: Many card holders not allowed to sue

Nearly half the banks that issue credit cards require you to give up your right to sue and instead go through arbitration to resolve a complaint, according to a 2005 Consumer Action survey.

In most cases, card holders have no right to appeal any arbitration decision.

In arbitration, both parties settle the dispute outside the courtroom. An independent arbitrator or a panel hears the case.

The process is often "too costly" for consumers because they typically end up $300 to $500 in debt from the arbitrators' costs, says Robert Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit.

But Tracey Mills, spokeswoman for the American Bankers Association, a membership organization for banks, says litigation is usually even costlier — and can take longer to resolve.

Arbitration "is supposed to be in both parties' interest," she says.

Multiple lawsuits are now winding their way through the court system, challenging the validity of arbitration clauses in credit card and other consumer-product contracts.

Because less than half of issuers require arbitration to settle disputes, consumers can always switch to another credit card issuer.

Protection: Bank can help you dispute a charge

One perk of paying with plastic is that if you're not satisfied with the merchandise, you can ask your bank to dispute the charge. Pay with cash and you'll have to rely on the merchant's goodwill to get your money back.

But the right to dispute credit card charges can carry restrictions. According to the standard language on credit card agreements, the merchant's address must be in the same state or within 100 miles of the consumer's, and the disputed amount must be more than $50.

Still, some credit and debit card issuers say they offer additional protections. If a fraudster gets hold of your MasterCard or Visa credit or debit card, for example, you usually have zero liability for unauthorized purchases.

Also, MasterCard and Visa say their debit and credit card customers can usually dispute purchases of any amount regardless of where they're bought, under certain conditions. These conditions include items that are damaged, defective or not received by the customer.

The bank will also get the merchant's side of the story. So keep detailed records. "If you're dissatisfied, that's a very murky area," CEO Robert McKinley says. "You must have a very clear-cut case against the merchant, and you have to know who you talked to" at the company.


This story ran on on March 2, 2006.