Written by Sean Pollock

Tuesday, 25 November 2008 20:54

The Federal Reserve recently announced that consumer revolving credit decreased at an annual rate of 6.8%, continuing the trend it established in December 2008. These numbers are a result of banks' revised credit policy, in which they tightened lending conditions and now approve fewer borrowers. But do these changes affect the consumer positively or is there a potential hazard to look for?

Being hit by the tight credit conditions many banks are now trying to make more off those who do qualify for credit. They increase interest rates, hide interest behind fees, apply structured commissions and other charges. All these surprises may have come to effect on your debt without you noticing it. There are a few card features to watch out for.

1. Your rate can change due to missed payments - not only to the card issuer but to another lender (they call it "universal default"). The kicker here is that the new rate is applied to both new purchases and outstanding balances. And some companies establish not only a due date, but a specific hour that the payment must be processed by in order to avoid a late payment penalty. Even if you pay online, some issuers don't credit payment transactions on the due date as on time. Many bills are sent with only days remaining on the grace period, so payments should be made quickly upon receiving the notices.

2. Penalties such as over-credit-limit fees or late payment assessments are tacked on to your balance. These additional costs also accrue interest along with the outstanding balance. If you carry a balance of at least $1000, the interest on that fee alone can become equal to the penalty in six months. Make sure you know your balances at all times, make payments as early as possible and review all disclosures and policies that come with your agreement.

3. Billing cycles can quickly increase your interest charges. Some issuers use "double cycle" billing where the interest owed is based upon a current and a previous balance. For example, if you made purchases of $1000 then paid $500 in that billing period, your next cycle would accrue interest on both the $500 balance and the original $1000. If you can, pay off your transferred balance before using the card for new purchases.

4. Balance transfers are typically paid off first when you make a payment, so that 0% loan you're getting on a transferred balance gets paid down, but any new charges accrue the interest charged by the card. This can add up to hundreds of dollars if you continue to use the card during the "teaser rate" period.

To stay on top of your credit you have to know exactly how your credit cards work, because your debt could grow quickly, and could undermine your financial well-being. When you receive disclosures with your bill, review them carefully and contact the issuer if you have questions. Pay particular attention to rate and fee changes. Don't be afraid to challenge adjustments made to your account that you believe are incorrect or unjust.