Risks of Credit Cards

Credit cards offer many perks, including the convenience of not having to carry cash, protection in case you lose your wallet, and the cash you get back or the points you earn by using the card. If you pay off your entire balance on time, every month, you have little to worry about. However, if you are not careful, credit cards have some risks you need to be aware of before using them.

  1. Interest Rates

    • Credit cards usually use variable interest rates that fluctuate as the market changes, meaning you cannot predict the rate you will pay. Also, the rates on balances that you carry on credit cards is very high because they are an unsecured loan, meaning there is no collateral that the lender can seize if you don't repay the loan. In addition, credit card companies will use almost any excuse to raise your rates, even if it is unrelated to your relationship with the company. For example, some credit cards will raise your rate if you are late on a payment on a different loan.

    Fees

    • If you can think of a fee, it can probably be applied to your credit card account. Some credit cards charge an annual fee just to have the card. If your payment is late, you will be charged a late payment fee. If you go over your spending limit, you will be charged an over-the-limit fee, even if you go over the limit only because of another fee that was tacked on to your account. Make sure that when you sign up for a credit card you read the fine print so you can protect yourself from excessive fees.

    Interest Calculation

    • Some credit cards use two-cycle billing, which calculates your interest based on the prior two cycles' average balance. This means that if you carry a balance, you cannot take advantage of the grace period for your new purchases. In addition, when you make your payments, most credit card companies direct the payment toward the least profitable portion of your debt. For example, if you have a balance transfer that is charged at 4 percent interest and other spending debt is at 19 percent interest, your payments will first pay off your balance transfer, and only after that portion is paid off will you get to pay down the amount charged at 19 percent.

    Limited Appeals

    • Most credit card companies make you sign away your right to file lawsuits in the fine print of the contract. Instead, you agree that any dispute will be settled by an arbitrator.

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