Understanding Hidden Costs of Credit Cards

Credit cards can prove to be very expensive if you do not handle them cautiously. When you take a card, there would be various hidden costs that you need to understand. Most people ignore the terms and conditions document that they get with the card, but this could prove to be quite costly.

Changes in rates

A common cost in most credit card policies is that the interest rate can be increased if you miss a payment on some other credit card, even if the credit card companies are different. The justification given is that the credit card issuer is adjusting the rates according to the risk of the credit in light of new information. There is some relief against this – the Credit Card Accountability Responsibility and Disclosure Act (CARD) allows an issuer to increase rates only for future transactions.

Credit card companies can increase rates even in absence of a payment default, by giving you 45 days advance notice. If you refuse to accept the changes in the policy, then the issuer can close the account. You will have to pay the existing balance based on the original terms. The problem is that if the credit card account is closed, then your credit score could take a hit. On the other hand, if you want to keep the credit card active, then you will have to pay more.

Misleading rewards programs

Do not get carried away by the rewards program of your credit card. You will often find the reward scheme for which you took the card, changed or abandoned after a few months. You might discover other restrictions on rewards too such as earning limits, blackout dates and other such conditions that reduce the benefit of the reward program. Consider all these factors before you sign up for a card based on its rewards policy.

Other charges

You might also have to pay a high cost for overseas transactions. This fee is applied when you transact in foreign currency and it can really hurt you. That is why it’s always better to use cash or travelers’ checks when making payments abroad.

The fees for late payments can also be quite high. Similarly, exceeding your credit limit will cost you a lot. So try to stay within the limit and make timely payments to make sure that you do not get a rude shock in your monthly statement

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