Win the Credit-Card Game

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Recent congressional hearings brought to light a lot of bad stuff happening in the credit-card industry.

I was really glad to see those hearings trigger some favorable changes -- which I'll get to in a minute.

The hearings also helped me understand the games an aggressive card issuer could play to its advantage.

So here are some fair warnings about the games credit-card issuers play, and actions you can take to deal with them.

These hearings followed a huge 114-page General Accounting Office report issued last year on the current state of the business.

Without going into too much detail, the GAO found a lot of questionable practices and in particular took aim at the weak or nonexistent disclosure of those practices.

I suspect credit-card issuers don't want you to know about these tricks of their trade.

  • Interest-rate games: Here's the most insidious one: the so-called universal-default trigger, where a late payment on any credit card or installment loan can cause your interest rate to explode -- sometimes 20 or more percentage points -- without clearly notifying you.

    Your issuer probably has some internal triggers, too. And those triggers can be hair triggers: Some issuers cut off the receipt of due-date payments at 9 a.m. Who would consider this to be the end of the business day?

    They can raise your rate if you make a late payment, have too much debt, get a new credit card or apply for a mortgage or car loan -- all without clearly or directly telling you.

     

  • Average daily balance games: Average daily balances are multiplied by interest rates to calculate interest charges. You might think you've paid your balance in full, avoiding interest charges. Guess again. Credit-card issuers are moving toward two-cycle billing, which penalizes consumers who carry a balance even if only occasionally.

    Here's how it works. Suppose you start with a zero balance and then charge something. If you don't pay the balance in full, they charge interest on the entire period, from the date of the first charge. So you end up getting no grace period.

And you've probably seen your grace periods get shorter and shorter. One of my major cards is down to about 13 days from when I typically receive the bill.

 

  • Payment games: Suppose you make a payment, and a portion of your balance is carried at a low interest rate because you did a promotion or balance transfer. Most card issuers will apply the payment first to the portion of the balance with the lowest interest rate. That's not in your best interest, is it?
    • Watch for change: The government and the Federal Reserve are taking this seriously. Some major issuers such as Citigroup (C) have "voluntarily" changed some of their practices. But legislation is likely on disclosure language, if nothing else. Also, it wouldn't hurt to let your legislators know where you stand.

       

    • Read the fine print: You should know what your agreement says. I'd go a step further. Call a customer service agent and have them -- or their supervisor -- walk you through terms for interest rates and changes, grace periods, balance calculations and all fees.

       

    • Pay your balance every month: And pay it as soon as you get your bill. This is far and away the most effective way to avoid traps.
  • Here's what I recommend to combat all these moves.

    Consumer anxiety and the threat of congressional action should give a wake-up call to card issuers. Some, like Citigroup, are visibly and publicly ending these practices; other big names are likely to follow suit.

    And as for disclosure, it's time for clear terms. As the hearings unfolded, JP Morgan Chase (JPM) announced a program to make rules "easier to understand."

    It's nice to see steps in the right direction. But I'd like those steps to get bigger and faster. That's not too much to ask, is it?

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