A credit card's ideal purpose is to make life easier, but credit cards aren't used in an ideal world, but in a web of fees, rewards points, interest rates, credit equations, and mile-long sheets of terms and conditions. We spoke to credit card industry experts and asked them to name the most troubling aspects of credit cards foisted on us by their issuers -- and they had more than a few answers.
There are still consumers who don't understand the basic function of a credit card or that they'll pay interest on the balance if they don't pay it all at once -- a confusion that benefits card issuers. "I get questions from people all the time who kind of think of it as a debit card or gift card, where there's magically money on it and you just get to spend it," says Brooklyn Lowery, editor at credit card comparison and analysis site CardRatings.com.
"You can't just take your balance and multiply it by 14.99 percent and get your extra payment for the month," Lowery says. Annual percentage rates are for the year and not a monthly fee, and sites such as CardRatings still have to provide rate calculators to show cardholders how much interest they'll pay each month.
A credit score above 800 is considered excellent; 700 to 740 or above is good; 650 to 670 or above is fair; and 550 to 580 or above is poor. Below that is very poor. According to CreditCards.com, the national average for credit card APR is 16.47 percent. The difference can mean 13.21 percent APR on a low-interest card and 23.68 percent APR on "bad credit" cards.
APR doesn't apply to every transaction made with a card. The lowest interest rate is for everyday purchases -- swiping a card at the grocery store or gas station -- but transferring a balance from another card may trigger a different (usually higher) rate. Cash advances also have different rates and require an additional fee. "It's a little plastic card and it looks like you can use it in any ATM -- and in many cases, you can," Lowery says. But it'll cost.
Typically, if you pay a balance off in full each month, there's a grace period of at least 21 days to pay off new charges without interest on them. Cash advances get no grace period. "If you withdraw cash from an ATM with your credit card, that is considered a cash advance, and interest will accrue immediately," says Matt Schulz, senior industry analyst at CreditCards.com.
You'd know more about interest rates if you read the agreement that comes with the card. CreditCards.com noted in 2016 that the average is 4,900 words, despite the Consumer Financial Protection Bureau urging issuers back in 2011 to cut the length and complexity; its model was 1,188 words. "It's not the kind of thing that people take the time to read through and understand what it's going to mean for them and how it's going to affect what they have to pay," Lowery says.
For most people, the table of interest rates and fees atop a card agreement (called the Schumer box after the congressman credited with the legislation behind it) is as long as the agreement needs to be. They began appearing after the financial crisis, thanks to the CFPB, and help folks who charge heavily, rack up rewards points, and pay off the balance every month. Card perks such as travel, car rental, and mobile phone insurance will be detailed further down. "Those benefits come with deductibles, they come with limits -- no more than two claims in a 12-month period and no more than $600 per claim," Lowery says. "If it's a new iPhone X that you just ran over with your car, that policy and a $200 deductible aren't going to cover it, and it's that stuff that's down in the agreement."
A zero percent APR credit card offer can be a huge help to someone in card debt who's just looking to transfer a balance and pay it off without accruing more interest. It lasts only a year or so, though, which can surprise cardholders. "Maybe 10 or 11 months into it, something reminds them 'Oh yeah, I need to be paying off that card,'" Lowery says. "It's not a slow rise when that into period ends: The new APR is right now in the 15 percent range and immediately kicks in." Miss a payment during that introductory period, and that fee can rise immediately.
When raising a credit limit, First Premier Bank charges a fee of 25 percent of the increase: With a $100 credit limit increase, a $25 fee is a fairly big deal. "These cards are targeted at folks with less-than-stellar credit," Schulz says, calling it "one of the most egregious" fees.
Even transferring a balance to a zero percent APR card, most credit cards will charge 3 to 5 percent of the balance. Some offers will waive the fee, but only for about 90 days. "That will probably still save you a ton of money … but you still need to figure that transfer fee into the balance you'll have to pay off," Lowery says.
"In a lot of ways, the people who need the credit most are going to pay the highest fees and the highest rates to get it," Lowery says. According to the 2012 Census, an estimated 48 million Americans (20 percent of adults) have credit scores below 600. According the the CFPB's 2015 Consumer Credit Card Market Report, that leads consumers to subprime credit cards with annual fees of as much as 25 percent of a card's credit limit and APRs near or exceeding 30 percent. Those cards include application fees, processing fees, maintenance fees, and authorized user fees adding up to $150 a year, or $2.5 billion for all subprime cardholders. Those cardholders get cardholder agreements that are 70 percent longer, on average, than the typical and written at a level suitable for someone with two years of college -- but more than half of mailings from subprime card issuers went to households with no education beyond high school.
As finance site NerdWallet has noted, households bringing in more than $157,479 a year pay almost four times more in credit card interest than households that make less than $21,432. But when a household making $150,000 a year has $10,036 in debt, that's less than 7 percent of income. When a person making $20,000 a year owes $3,611, that's 18 percent of their annual income.
The Federal Reserve Bank of New York put U.S. card debt at $834 billion at the end of 2017 -- 4.6 percent of it past due. That's not only up from a post-recession low of $700 billion in 2011, but closing in on the recession-era high of $870 billion in 2008. NerdWallet estimates that the average household carrying card debt owes $15,654, based on Federal Reserve numbers putting total revolving credit debt at more than $1 billion.
Each time you apply for a credit card, so-called "hard inquiries" are sent to credit firms such as Experian, Equifax, and TransUnion. A score may drop by 10 points or more, a far bigger deal for some applicants than others."That's why we tell people not to apply for a credit card if they already know that their credit doesn't qualify them for that card," Lowry says.
Credit card companies want their cards used, but credit scores improve only by keeping outstanding balances low. A credit utilization rate is key, and determines how well you use available credit. If your card limits total $10,000 over three cards, and you're using $4,000 of it, the utilization rate is 40 percent. The ideal rate is zero; Experian advises keeping it below 30. That said, there are some situations in which opening another credit card can actually help, but only if you keep paying down debt. "Assuming you're approved for that card, use it responsibly, and make your payments on time, your score should rebound within two to three months to the number it was before you applied," Lowery says. It can grow too.
There are hundreds of rewards credit cards out there, ranging from all-purpose to gas, airline, hotel, and retailer cards. If you have a travel rewards card but don't take vacations that often, you aren't doing you or your credit any favors. "Try to find a card that fits within your lifestyle and credit profile," Lowery says.
Some card rewards points never expire; others disappear if left untouched for 18 months to three years. "It's rare for rewards to expire, and as long as a card stays open and active, usually rewards will stay there," Lowery says.
If card rewards points are associated with a specific airline or hotel chain, Schulz says, closing that card probably won't lose the points. If points are tied to a specific card -- such as with the Chase Sapphire Reserve or Barclaycard Arrival Plus World Elite MasterCard -- you probably will. "Be sure to keep that in mind when you're considering whether or not to close an old credit card," Schulz says.
Some cards offer cash back in rotating categories that correspond to the season in which people shop for those items, Consumer Reports says. Discover, for example, tailors its 5 percent cash-back program around a seasonal calendar of retailers and restaurants. But there's a cap on how much can be earned in each category ($1,500, in Discover's case).
A credit card with an annual fee isn't such a bad thing if it's used effectively. If you're a frequent traveler, a loyal shopper, or just like to reap rewards, a $95 annual fee might pay for itself; paying a $550 annual fee on an American Express Platinum Card and not traveling is the wrong choice. "If you can't offset the credit card fee with the points that you're earning, it's the wrong credit card for you and you've wasted your money," Lowery says.
While cards such as the CapitalOne Venture, Chase Sapphire Preferred, and Discover It Miles don't charge transaction fees to travelers abroad, they're in the overwhelming minority. CreditCards.com puts the average foreign transaction fee at 1 percent to 3 percent, which isn't always so slight, depending on the traveler. "It's not uncommon for them to go up to 5 percent per transaction," Lowery says. "If you come home and it's cost you 5 percent plus whatever the conversion is, it can put kind of a damper on that post-vacation glow."
Some higher-tier cards offer $200 to $300 a year in travel-related statement credit, but that requires knowing what constitutes a travel-related expense. It's often not what the cardholder imagines. "Sometimes it's only ancillary airline fees like baggage fees or an upgrade," Lowery says. "Other times it's much more general, from taxis to tolls, but it depends on the card."
Some credit cards require a specific amount to be spent before cashing in rewards. As NerdWallet explains, the Blue Cash Preferred Card from American Express requires cardholders to have at least $25 in rewards stored up ($417 in spending) to redeem rewards. The Cashbuilder Visa requires spending of a whopping $3,333 to get to its $50 minimum rewards redemption. And that's just the first tier.
The Blue Cash Preferred Card from American Express offers 6 percent cashback on purchases -- up to $6,000. Other cards will offer quarterly, rather than annual, caps on cashback rewards, which limits the amount of rewards accessible at a time. Any spending beyond that cap brings cash back at a reduced rate, or not at all.
Miss a payment on a zero percent APR offer under any circumstance and interest rates can skyrocket -- and bring a $13 to $35 late-payment fee. Make a habit of it and watch APR rise as your credit score falls.
There are cards that will woo you with enough points to get a free round-trip flight. But Consumer Reports warns that airline rewards cards may contain restrictions on use of points and blackout dates, making bank cards a safer bet. Just keep an eye on APR and rewards terms.
Some card issuers will waive a first-year annual fee, but that's likely it. If the issuer offers fee-free balance transfers or zero percent APR, expect that to be temporary as well. While active military and persistent cardholders may be able to get fees waived, waivers are fleeting.
For applicants with low credit scores, secured credit cards are their last good option and best way to improve credit. But they require a refundable cash deposit, usually equal to the card's limit but sometimes less. Some have annual fees, but they tend to have lower APRs than subprime credit cards (under 20 percent) and often allow cardholders to "graduate" to a better, non-secured card once they've shown some responsibility.
The federal deadline for U.S. card issuers and merchants to switch to chip-and-PIN cards and readers from swipe-and-signature was October 2015, but U.S. cardholders have still been scrawling nonsense onto receipts. Though card issuers announced this year that they're doing away with the signature requirement here and abroad -- getting in step with much of the rest of the world -- consumers will have to scribble until the changeover is complete.
Despite implementing enhanced safety features such as chip-and-PIN, card payment remains perilous. Online card fraud is now 81 percent more likely than in-store card fraud, Javelin Strategy notes. Card technology has improved immensely, but it's annoying it means nothing when we're still giving online retailers credit card numbers.
