You did your due diligence and researched your credit card options.
You signed up for cards with good interest rates, and you pay them off on time.
You're home free when it comes to credit cards, right?
Well, not really.
That's because there are countless credit traps out there that can snare you.
Here are some of the most common along with information on how you can avoid them.
The most common credit trap? Credit card companies increasing the rates on your cards.
In 2009, Congress passed The Credit Card Accountability Responsibility and Disclosure Act, which makes it illegal for credit card companies to increase the interest rates on existing card balances as long as you make payments on time.
However, if you miss two consecutive payments, they can increase the interest rate on your existing balance. In addition, the act does not prevent them from increasing interest rates on your future purchases at any time and for no reason.
That means even though you did your due diligence and selected a credit card with a reasonable interest rate, nothing stops the company from upping that rates on future purchases.
Even the smallest mistakes like a single late payment can result in a significant rate increase on future credit card purchases. You need to be careful that you always pay attention to when your credit card bills are due. Set up calendar alerts to remind you. Or sign-up for automatic payments.
The next credit trap is the credit card with the zero percent promotional rate.
Marketers know that people are much more likely to respond to offers that uses terms like “free” and “zero percent interest.”
But be aware: Not all zero percent offers are legitimate ones.
Some credit cards, especially those offered by retailers when you make a purchase, offer zero percent financing on in-store purchases. However, if you do not pay off the balance by the end of the promotional period, you could be charged interest retroactively and at very high rates.
There are times when zero percent financing is a good deal. You need to read the terms carefully and understand if interest is actually being waived, or if the company is just deferring it to a later date. No matter, always plan to pay-off the purchase during the stated promotional period. Otherwise, it could end up costing you a lot of money.
The next credit trap can happen any time you travel outside the United States.
Credit cards can make purchasing things when you travel abroad easy and convenient. You don't need to carry cash or deal with complicated exchange rates. But most people aren't aware that they can get hit with foreign transaction fees when they use their cards outside the U.S. These fees can go as high as three percent or more, which can really add up over the course of a trip. It can be even worse if you study abroad for a long period of time.
The only way to avoid this trap is to check whether your card charges these fees before you travel outside the U.S. If it does, then consider finding another card that doesn't charge them for when you travel abroad.
The next credit card trap involves making only the minimum monthly payment on your loan. By law, credit card companies are forced to include minimum monthly payment information on their statements. While the law was designed to discourage people from making only the minimum payment, in some cases, including this information makes it seem like it's an okay option. But it never is. It could cost you a lot over time — and you might actually end up paying for an item long after its useful life is over.
The final credit trap many people fall into is around promotional interest rates on balance transfers. You receive a low or no-interest rate loan when you transfer balances from other higher-interest cards into a new lower-interest one. What most people don't realize is that new purchases charged on these cards could come with very high interest rates.
The only way to avoid this trap is to read all the fine print that comes with balance transfer offers. Always make sure you know what you're getting into and what it will cost.