The Good, the Bad and the Ugly of Credit Cards, Part 2: The Bad
This is the second part in a short series about credit cards and the people who use them. If you missed the first part, take a look.
Part 2: The Bad
If you are a Type B credit card user, you are making money off the credit card companies, not the other way around. Taking advantage of rewards programs isn’t always a walk in the park. The credit issuers make it as difficult as possible for the Type B user to succeed. “The Bad” section focuses on the straightforward ways credit card companies try to take advantage of their customers. For the deceptive methods, just wait until you read Part 3: The Ugly.
Liz Pulliam Weston outlines how companies try to prevent their customers from taking advantage of the issuers. In one example, the author describes the situation with my particular rewards card:
One reader touted the great deal he got on one of his cards: 5% back on purchases made at groceries, gas stations and pharmacies. The only problem: The deal had quietly expired, and the company had reduced the “everyday purchases” rebate on those categories of spending to 2%.
When there are too many Type Bs for the others to subsidize, companies start lowering their rewards. Interest rates are also higher on rewards cards. This doesn’t matter to Type Bs, but lowered rewards with higher interest rates and fees negatively affects the risk/reward balance.
Another major issue for active Type Bs is the credit score. Reward seekers that jump from one credit card to another, opening up new accounts in a short amount of time, will see an effect on their FICO score. This score is used by companies when determining the interest rate a bank may offer when the customer applies for a loan or a mortgage. By chasing the best rewards from card to card, our Type B may screw himself by having to pay thousands more in interest on a major purchase like a car or a house.
Your credit may be checked at other times as well, such as rental applications and certain job interviews. For some people, such as retired folks, FICO score should not be an issue. Keeping it low could mean missed rewards, but this philosophy is certainly not for everyone.
On top of this, some credit card companies cheat by reporting inaccurate (or perhaps “differently accurate”) numbers to the reporting agencies. This is deceptive — and ugly, as I’ll write in Part 3. You can check your credit report free three times each year through annualcreditreport.com and MyFICO allows you to purchase your credit score. (I believe all access to one’s own information should always be free, but life in a capitalist society dictates otherwise.)
Late fees, interest fees, and annual fees are credit card companies’ bread and butter. They will do whatever they can to get people to pay them. Many already do, but those who don’t are targeted with more tricks.
Most credit cards offer a grace period. When your bill arrives, you are not charged any interest until the bill is due, which is usually 25 or 30 days after the statement date. My rewards card started with a 30-day grace period. Most likely due to my consistent on-time payments, one issuer decided to shorten my grace period to 20 days with little or no notice. If I had been using automatic scheduled payments and did not notice the change, my payments would have been late, and I would have been charged a late fee plus interest.
All it took was a simple call to customer service to have them change my grace period back. I didn’t have to speak to a supervisor and I didn’t have to yell. Type As might not have noticed the change or might not have understood the disadvantage of the shorter grace period. Type As are the perfect customers from the company’s point of view.
The last time I missed a credit card payment was many years ago. I had taken advantage of a store “0% for six months” offer in order to purchase a piece of technology I needed in order to do some side business work. Well, they didn’t send a statement one month and my disorganized self at the time did not make the payment. I received the next statement which included a late fee as well as back interest for every payment made so far. It was a shady switch, but it was my fault for missing the payment.
A call to customer service solved my problem. They were surprisingly sympathetic about the unsent statement and agreed to reverse the fee and interest charges. I would never expect that to happen these days. Perhaps one fee would be refunded, but credit card companies seem more unscrupulous lately.
Credit card companies are enablers. The low-hanging fruit of available credit for even those with histories of bankruptcy make it easy for the addict to get a fix. It’s not always people with proven irresponsibility that fall into the trap, however. Credit card companies are great at marketing to college freshmen, many of whom are away from home for the first time and looking for a way to pay for college life expenses.
This is where education must play a role. If parents teach their kids about responsible money management — through modeling appropriate behavior as well as through open discussions, students will be in much better shape when confronted by the free tee-shirt table at New Student Orientation. Without that education, there exists a void or vacuum in the young adult’s brain. Nature abhors a vacuum, and campus credit card marketers eagerly await to fill that void. I touched upon this topic earlier this year when discussing who is to blame (Part 1 and Part 2) for poor money management skills.
There’s much more to come in Part 3: The Ugly. In the meantime, here’s another question: What credit card traps have you encountered and how did you escape?