Don’t let anyone convince you that credit card companies are having a hard time dealing with new regulation. I received a warning in the mail yesterday from Bank of America. In fact, I received two warnings, in separate packages, related to the two Bank of America credit cards I own but do not currently use. The second page of each package included, in a big, bold, typeface, that I would be subject to a penalty APR of (up to) 29.99% APR if I do nothing more than make a late payment.
The late payment would not need to be the type that gets reported to the credit reporting agencies. One day late, and Bank of America could hike this rate for any future activity on the card. This penalty rate can remain on the card “indefinitely.” The bank might review my credit activity and reduce the rate, but I am confident Bank of America would gladly leave a penalty rate as high as possible.
Graciously, the issuer will notify me — or any other customer this change in the terms applies to — 45 days in advance of the increase.
It’s been a long time since I’ve paid any interest on a credit card, and I avoid late payments by using automatic transfers that pay the full amount of each bill each month without my intervention. Despite this, problems can always arise. Half asleep and still jet-lagged, I logged into my credit card account Wednesday morning and happened to log into my checking account as well. I noticed the credit card bill was due that day but I hadn’t transferred money to the right checking account to cover the automatic transfer. Unless I intervened, the scheduled payment wouldn’t go through. I managed to link a different checking account and pay the bill before the end of the day. If I had waited until yesterday to log into my credit card account, I would have been late.
This is another reminder that I need to simplify my bank accounts. Also, anyone can make mistakes with their payments, and one late payment could send a credit card customer into the penalty box. It might be difficult to get back on the ice. Nearly 30% APR is nearly usurious. A $10,000 balance at 30% APR would take twenty years to pay off and would cost a total cash outflow of more than $26,000 (assuming a minimum payment of the greater of 4% or $20 of the balance and paying no more than the minimum).
The notice also identified revised limits for cash advances and reiterated the regulation that requires credit card companies to apply payments to the balance with the highest APR first.
Updated September 8, 2016 and originally published April 29, 2011.
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You make a good point – the penalty APR will only apply to future transactions on the card. That was one of the protections from the Credit CARD Act.
A person would have to voluntarily spend $10,000 on their card after the penalty APR was in place to have a $10,000 balance at 30% (as your example at the end shows). I would think most consumers would have other options available at that point, including other credit cards, rather than put $10,000 in spending on a card at 30%.
It shows that you have to really read the fine print and any notices you get from the credit card issuers. You can’t miss a thing. Thanks for the reminder.
If there were ever an industry that I would support being 100% regulated, it would be credit cards.
I received the same notice yesterday. It didn’t bother me at all. First of all, you don’t have to use this card if you don’t like the 30% penalty APR. Call them and close the account. There are plenty of other cards to choose from. If all cards have a 30% penalty APR, don’t use any credit card. Second, you have to carry a new balance for the penalty APR to apply. The normal payment grace period still exists. You can still make new purchases. As long as you pay off the new balance, you still don’t owe any interest. Better yet, when you are notified you are now subject to 30% APR, just stop using the card. 30% APR applied to zero is still zero.
Bottom line: nothing to worry about. Close the account if you don’t like it just on principle. Stop using the card if you are notified you are now subject to the penalty APR.
Increased penalties and interest only increases the bank’s profits. The people who cannot or will not act responsibly with their credit card do not think about the penalties. I wonder if people had to take a financial literacy test before you could get a credit card, if that would reduce the debt and delinquencies? I don’t think the credit card companies would be in favor that though!
You state “This is another reminder that I need to simplify my bank accounts.”
Why stop there. Why not simplify all financial accounts, or even your financial life.
If you didn’t use credit cards, the fine print wouldn’t matter. There wouldn’t be a need to transfer money to pay a bill becuase you would have used a debit dard instead, and it would have already been deducted from your account.
Why anyone would ever transact business with these companies baffles.
I know why I transact business with these companies, so I can reap the benefits of the rewards that they offer. I have faith in my ability to keep on top of my finances to pay off every card on time every time, and in the meantime I am very far ahead in terms of money I have had to pay them compared to money I have earned through rewards.
Ah yes…the rewards. They are the path to riches. Free money as they say. The wise know such things do not exist without a cost.
Of course there is a cost to those rewards. There has to be, or they wouldn’t exist.
But that cost is rarely measured or counted.
But it is still there.
The risk of tbork84’s strategy is that one might miss a payment and forfeit the rewards. There is no risk in Troy’s strategy because it automatically forfeits the rewards.
I’ll take the small risk for the $400 in rewards I get every year.
Troy,
We all wish we could use debit cards all tha time but simply life won’t let u.. Every one checks credit scores to get approved for almost everything now.
We just gotta b smart n responsible to check what we are signing our selves up for. and pay for what we buy
I use debit cards all the time, and have for years with no problems. I have yet to run into an instance where a CC was the only option. I have traveled, purchase expensive things, etc. I’ve lived an extremely full life and no issues.=, so I am curious about your “life won;t let you” stance.
And you bring up a great point. Being smart and responsible and pay for what we buy. My thoughts exactly. I prefer to pay for what I buy when I actually buy it. Novel, I know, but paying for something 30 days later seems kind of silly, huh?
Most are used to it so it is normal now, but the thought of purchasing something and not paying for it at that time is a relatively new concept. I think when I go to buy milk, I should buy milk and pay for it that day. I am not interested in financing a gallon of milk, or a tank of gas, or a round of beers for 20-30 days. Regardless of whether or not you pay any interest, or get rewards, or make money, or get points, or win a teddy bear, the simple fact remains….
You are borrowing money to purchase milk, or gas, or a beer. Just because a bunch of other people who have no money think this is a wise move doesn’t make it so. It takes a majority of people who don’t have money and carry a balance for you to “earn” thos rewards.
The issuers are the winners.
Flexo, I also have a bank of america credit card and received the same letter in the mail about the 30% APR for late payments. I just go to my nearest bank of america branch and pay my credit card balance there so I have no issues.
Well, it sure looks like time to move credit card accounts to independent local community banks or credit unions! In fact, all other accounts also. Support your local banks! You should enjoy better treatment and benefits! You will be glad you did! Middle America continues to be adversely gouged by the gross policies amp; programs of BIG BANKS, especially Bank of America.
Out of curiosity, how easy is it for people with poor credit to open a bare bones account with a credit union? Easier or harder than the “big banks”?
Yea thats u that doesn’t need a cc but coming up in tha world as 18 years old n already moved out is difficult ta buy tha things I want er need with a min wage paying job..wut if in tha future I want a loan fer a house or nice car? Tha way I see it, its good to have some kind of credit jus in case. also so that your paying reputation is high. U dont really have to only use ur card on things u can’t afford.. I kno I can buy a tank of gas or gallon of milk with debit but id rather not so I can build my credit n once its good then I wouldn’t really have to worry about my credit as much..
With one card with a balance that i’m working on paying off (still in my snowball) i make a payment the night before my paychecks post. No risk of late payments when you are making 2-3 payments a month. It works for me and helps me keep on top of my spending. I’m more likely to adjust my spending down if income is not as good as my budget predicted.
i also received the letter flexo, and while i agree it is extreme, it will not make me take an action such as closing the account. i will accept that a late payment can generally happen to anyone in today’s world given the way one is pulled in so many different directions, but i chose to take the responsibility when i opened the account. is the rate hike ridiculous? sure, but i know the rules, so it would be on me if i made a late payment.
perhaps i’m too simplistic in this way
I am getting ‘fine print fatique’. (spelling?) I am staying put with wrting out checks with the exception of my mortgage. All the available options are stressful.
We use cash. 0% APR.
If this annoys any of you, simply max the card out and refuse to pay any more. All the bank will do is make some noise, send some letters, turn you over to a phony collection agency which will send more letters, and, of course, deny you entry into their Funny Money debt club.
Credit cards are used to purchase overpriced items (clothes) and so-called entertainment. Live within your means people, and quit playing this silly game.
Plenty of people live within their means while still using a credit card. Flexo might correct me but i believe 40% of credit card users do not carry a balance (they must pay it off every month).
I got the BoA note and called them about the penalty APR being applied to “new transactions” .. as opposed to unpaid balances. They read me their copy of the letter and agreed .. it says “new transactions.” So our exact reading was that .. if I am a day late on a payment (in full) and get placed into their penalty box, then (45 days after notification) use the card for a new purchase of $1000, I am getting a bill for $1299.99 on my next monthly statement. And the letter says that I will be in this penalty bracket indefinitely (at the bank’s discretion) .. for having been late on a payment (even though I paid in full). A bank recently mischarged me for ~$15000 .. oh would I like to get a check for $4500 each month (indefinitely).