Credit card companies are established business entities and they should make
profits in order to survive. There are three main sources of their income. The
first is the fees they charge from merchants who do credit card transactions,
second is the fees they charge from credit card holders, like annually fees,
late payment fees and other fees. The third way the credit card companies make
money is by the interest rates they charge on your outstanding balances. These
three means are often used by credit card companies in ways which don't come
in credit card best practices code of conduct. What are they? And how should
a credit card holder avoid them? Let's have a look.
Sometimes the credit card companies slap a late payment penalty on the credit
card holder even if they are few seconds late. This will always appear very
ridiculous on the credit card companies behalf. But they are factually correct.
Even if you are two seconds late, you are late and the credit card company has
every right to charge you a late payment fees. This is definitely not a good
credit card practice. The only way a credit card customer can avoid this bad
experience is to take care that the monthly repayment amount reaches the credit
card companies office on time. The sooner the better.
Universal default clause- is one of the notorious means to slap a high apr
on credit card customers. When credit card companies, state that they will enforce
universal default clause in their credit card terms, they essentially means
that a late payment anywhere, be it your telephone bills, utility bills or anywhere
else, will attract penalty apr on your credit card. The best remedy for this
situation is not to apply and use a credit card which has universal default
clause. Secondly, if you have a credit card which enforces universal default
clause, make sure you never miss any payments what so ever.
Credit card companies apply payments to outstanding balances in a very particular
order. First the balances with the lowest apr's are dealt and then remaining
payments if any are used to service outstanding balances with high apr's. Let
us take an example. Suppose you have an outstanding balance of $1000 at 15%
apr and you take a cash advance of $2000 with your credit card. The cash advance
attracts a high apr of 25%. When the monthly statement comes, you make a payment
of $1500, the credit card company will service the debt with lower apr that
is $1000 at 15% first, and the remaining amount will be used to service the
$2000 cash advance. So, the credit card company will continue earning high interest
on the cash advance you have taken. Now, if during the next month you have added
$1000 more to your credit card bill and you decide to pay $1500 again. The major
part of this monthly repayment will be used to service that $1000 at low apr
rate and the remaining will be used to serve the remaining part of your cash
advance which is definitely at a very high interest rate. So, do you feel the
heat now? To counteract this situation, the only remedy is to pay all your monthly
outstanding balances in full.
The three situations mentioned above are common cases of credit card worst
practices. These tricks are used by credit card companies to generate huge profits.
The hapless credit card customer is definitely doomed if he is not properly
educated about these traps.