Truth Or Hype In Credit Deals

President Bush reads over a draft of his State of the Union speech in the Oval Office Tuesday morning, Jan. 31, 2006, in preparation for the annual address to the nation.
White House Photo/Eric Draper
Last year, consumers received three billion credit card solicitations. This year, we can brace ourselves for even more. How good are those offers, really? There's danger in the fine print. CBS This Morning Money Editors Ken and Daria Dolan help clear up credit card confusion.

If you take the time to read the small print, you may find some of the solicitations are worthwhile. Daria Dolan has this advice:

  • Virtually anything worth knowing is in the disclosure box, ordinarily located on the back of the card application form. It will list the annual percentage rate (APR) you'll pay, the grace period before interest will be charged, and list any fees and penalties.
  • If you don't like the conditions listed in the fine print, throw away the offer. But before you do, rip it up. They can include details about your finances that you don't want to reveal to the bad guys who sometimes go looking for that information in your garbage!

The Dolans say pay attention to rates: "teaser" rates for preferred customers now average 4.75 percent.
  • One of the things they really don't want you to know is that the super-low introductory rate they lured you in with may go up before the six-month introductory period is over. How can this be? Well, if you look in the disclosure box on the back of the offer, rather than say that the introductory rate is 5.9 percent, for example, it will say that the introductory rate is some "percent plus prime." That's credit card company talk for "our rate depends on the cost of borrowing money according to the Federal Reserve in Washington." It gives the credit card company leeway to hike the interest rate it charges you if rates go up.
    Managing Your Money
  • One other warning: Some credit card issuers extend the low introductory APR to balances you transfer to the new card, while others apply it only to new purchases. Be sure you know what the introductory rate you sign up for applies to.
  • Even with the low introductory rate, it's a common practice in the industry to transform the teaser rate to the higher "standard" rate after just one late payment. If you are late twice in any six-month period, the APR can zoom to well over 20 percent.
  • Transferring balances may not always be a good idea. To qualify for favorable terms on a new card, you may be required to transfer a portion of the unpaid balance on your current card. Check with the issuer to find out how long it usually takes to make the ransfer. It could take six weeks, and during those weeks the clock is ticking on your introductory rate period.
  • Convenience checks may be convenient, but they're not cheap. Many credit card companies these days push convenience checks. They send them to you as soon as you are approved for a credit card. Or, they send them to you unsolicited in the mail with a letter telling you how easy they are to use. For example, how you can use them to pay for that vacation you've been dreaming about but can't afford, or to pay off other bills. What they don't tell you is that convenience checks work differently from your credit card.
  • The interest rate on convenience checks may not be the same as with your credit card - it's probably higher! If the rate isn't clearly disclosed on the offer, call the company before you use the checks. Besides the interest rate, you need to look out for transaction fees. Most cards charge an average fee of two to four percent of the amount you write the check for.
  • Unlike credit cards, checks don't come with a grace period before interest is charged. The interest on a convenience check starts piling up as soon as you write it. If you get convenience checks in the mail, rip them up.
  • Pre-approval does not guarantee you a card. Even if you are "pre-approved," you can still be denied because of something on your credit report. But they will usually give you some kind of credit line.
  • Don't believe "pre-approved" credit line offers for "$50,000 - $100,000." The average credit limit is $7,800 for Gold cards and $6,200 for Platinum cards. They will usually give you some kind of credit, but it might be significantly less that what they cheerfully call "pre-approved."
  • Don't get excited about "perks" like credit card insurance and travel insurance. While some offers for auto insurance for rental cars may be worth considering, most perks aren't worth much.

The bottom line is to read the small print on all credit card offers. Let your current card issuer know that you will defect for a better offer. If you are a good customer, the issuer may lower your APR or waive a fee to keep you.

Some deals do work in your favor:

  • You can take advantage of the low-rate introductory period to get out of debt. Pay off your debt at that low rate, but be sure to work out a realistic payment schedule that you will stick to. Eliminate your balance before the introductory period ends.

    By Ken and Daria Dolan