Credit cards might seem ubiquitous in today’s culture, but there are plenty of ways to build credit without a credit card. That’s not to say some people can’t benefit from credit cards, but both cardholders and non-cardholders should be aware of the scariest facts about credit card issuers. Banks, retailers, and credit card companies wouldn’t be quick to volunteer this information, but it’s important for consumers to know more about this mysterious, multi-billion dollar industry that holds so much power in Washington.
Despite increased regulations put in place by the CARD Act of 2009, credit card companies are still doing plenty of shady things you should know about. Here are some of the many cases in which the credit card industry would prefer you were ignorant.
1. There is no federal law that sets a maximum APR
While your credit card may have a maximum interest rate stated in its “terms and conditions,” there is no legal cap. Many states have usury laws that regulate interest rates on all loans, but they only apply to banks based in that state. That’s why the major credit card companies are incorporated in Delaware or North Dakota, where there are no usury laws. The average interest rate was 14.9% in April 2015, but penalty interest rates typically hover around 30%, and one subprime credit card issuer staunchly defended its 79.9% APR credit card in 2009.
2. Fixed interest rates are never really fixed
Even if you always pay on time, the “fixed interest rate” on your credit card can be raised basically any time the credit card company feels like it, according to Forbes. Issuers just have to give the customer 15 days notice of the rate change. Always read any correspondence from the credit card company to avoid a nasty surprise.
3. If you are late on 1 card payment, the APR on all your credit cards could be raised
After just one late payment, you could end up with a penalty interest rate across all of your credit cards, even if you have always paid the other card balances on time. Monitor all of your accounts to ensure you know your APR for each card, and always make payments on time from this point forward. You will likely be stuck with the higher APR for a while, but according to the CARD Act, credit card issuers must reconsider a cardholder’s penalty interest rates after six months.
4. Your APR can be raised if you are late on any bill, not just your credit card bill
Many credit card agreements now include a clause saying the company can raise your APR if you are late on any bill, not just a credit card bill. The credit card company monitors your credit report on a regular basis to look for any change that could lower your credit score and allow the company to raise your interest rate. This is called “universal default” pricing, and it can be triggered by several activities including securing a new mortgage or car loan or being late (even once) on a credit card, mortgage, utility, or car payment.
5. Your rewards program can change terms at any time
One way credit card companies attract new cardholders is with rewards programs, but they can change the terms of these programs at any time. Sometimes the number of points or miles needed to redeem benefits will increase. Cash back cards with no annual fee can be a better deal, but make sure there isn’t an annual charge that kicks in after the first year. The fine print that comes with these rewards cards is often confusing, which has led the Consumer Financial Protection Bureau (CFPB) to investigate these programs to ensure they use clear disclosures.
6. It’s a myth that paying off your balance on time or early harms your credit
This is a popular myth, but in reality, maintaining a balance on your card absolutely will not improve your credit score, and it could actually hurt your credit if the balance you are carrying is a large enough portion of your credit limit. Paying on time or early should be your first priority to avoid late payments, interest payments, and credit damage. Pay off your transactions on the same day or at the end of every week so you will get into the habit of considering how much money you have in the bank before you swipe.
7. ‘Revolvers’ keep credit card companies in business
Credit card companies call cardholders who carry a balance every month “revolvers,” and these customers are a major source of profit because they are constantly paying interest. “Transactors,” on the other hand, are customers who pay their credit card bills in full every month, avoiding interest charges. These customers have also been called “deadbeats,” since they offer little benefit to the credit card company. In many cases, it’s the revolvers or subprime customers that banks will target because they generate significant returns.
8. Low minimum payments are for their benefit, not yours
In the past, a 5% minimum monthly payment for a credit card was typical, according to U.S. News and World Report, but today’s minimum payments are usually 2%. This might seem attractive to customers, but for revolvers, who account for more than 40% of American cardholders, it means it will take much longer to get out of debt if only paying the minimum each month. Credit card companies defend the low minimums, claiming this payment is meant only as a last resort, but these companies stand to collect a lot more interest payments from the many cardholders who consistently carry a balance.
9. The credit card lobby worked to make it more difficult to declare bankruptcy
After spending more than $100 million lobbying for the bill over eight years, the credit card industry succeeded in pushing the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) through Congress in 2005. The law made it much more difficult to discharge credit card debt by declaring bankruptcy. Advocates of the legislation claimed it would reduce losses to creditors, who would then pass those savings on to borrowers in the form of lower interest rates. According to a report in the American Bankruptcy Law Journal, the actual result was increased costs for consumers and soaring profits for credit card companies.
10. The credit card industry spends billions of dollars on marketing
Banks and other financial institutions spend approximately $17 billion per year on marketing, according to a 2013 CFPB study. About $5 billion per year is spent on awareness advertising, largely in the form of television ads for credit cards. Interestingly, much more ($12 billion) is spent on direct marketing, such as mail, email, and digital ads. The CFPB compared these spending figures to the amount of money spent on financial education in the U.S., which comes to roughly $670 million. In other words, banks spend $54 per person on advertising, while the money spent by banks, non-profits, and government bodies to support financial education comes to about $2 per person.
Credit card companies also spend millions of dollars marketing their student credit cards directly through educational institutions, according to a 2010 report released by the Fed. Credit card issuers paid a whopping $83,462,712 to colleges and universities to promote student credit cards in 2009.