Credit card companies are masters of marketing. From cash back to travel rewards, and 0% introductory rates to gas rebates, credit card companies have turned a once fledgling industry (remember MasterCharge?) into a multi-billion dollar juggernaut. While taking advantage of credit card rewards can be a financial boon, care must be taken that fees and default interest rates do not ensnare us. In this article we will take a look at those fees and interest rates from a popular credit card–the Discover More Card, Wildlife Edition.
Credit Card Fees
The Discover More Card is a highly rated card and comes with a 12 month 0% balance transfer feature. And that’s why I’ve chosen it; to show that even the best credit cards come with some eye-popping gotchas. The first place to start when reviewing a credit card is the “Schumer Box.”
Named after U.S. Senator Charles Schumer who sponsored the federal legislation that requires it, the Schumer Box provides consumers with some basic information about a credit card. Here’s the Schumer Box for the Discover More credit card:
Annual Percentage Rate for Purchases: The first row of a Schumer Box discloses the APR for purchases (APRs for cash advances are generally higher). For the Discover More card the APR is 0% until February 2009, and then it adjusts to a rate between 10.99% and 18.99%. Why the range? Credit card companies often express the APR as a range because a consumer’s credit score and credit history will dictate what interest rate the credit card company will charge. This is just another good reason to improve your credit score, and you can get your free FICO score online.
Other APRs: Here you’ll find the card’s APRs for non-purchases, such as cash advances, balance transfers, and default rates. Take note of the default rate because it is almost always a whopper. What this means is that if a consumer defaults under the credit card agreement (e.g., not paying a bill on time or going over the card’s limit), the credit card company can hit them with the default rate. Here that rate is 30.99%.
Variable Rate: Most credit cards have variable interest rates based on the prime rate. For the Discover More card, the rate is set at prime plus an interest rate ranging from 5.99% to 13.99%, again depending on the cardholder’s credit score.
Annual Fee: The Schumer Box must also disclose the annual fee for the card. With the Discover More card, there is no annual fee.
Other Credit Card Fees
The Schumer Box does not include all of the information one should consider when choosing a credit card.
Balance transfer transaction fee: If you plan to use a balance transfer feature of a credit card, understanding the transaction fee is a must. For the Discover More card, the fee is 3% for each balance transaction, with a minimum of $10 and a maximum of $75. The key is to make sure the balance transfer fee is capped, as it is here.
Cash advance transaction fee: A cash advance is different than a balance transfer in that it is not to pay off another credit card or debt and is generally not part of an introductory offer. Cash advances typically carry hefty transaction fees and high interest rates, so they are best avoided if possible. For the Discover More card, the transaction fee is 3% for each cash advance, with a minimum of $5 and no maximum.
Late fee: Pay your bill late and credit card companies tack on a late fee. And sometimes card companies assess late fees unfairly, so it is important to keep a close eye on your card balance. The Discover More card imposes a $19 late fee on balances up to $250 and $39 on balances over $250.
Over limit fee: It is important to know the credit limit on your card, because if you charge more than the limit, credit card companies will levy a fee. With the Discover More card, the over limit fee is $15 on balances up to $500, and $39 on balances over $500.
Credit Card Fine Print
While reading the credit card agreement is important, there are two typical provisions found in most card agreements that are worth mentioning here: (1) a payment allocation provision; and (2) an arbitration clause.
Payment Allocation: Because of 0% introductory rates and different rates for different types of transactions (purchases vs. cash advances), you may have a card balance subject to more than one interest rate. The payment allocation provision of a credit card agreement spells out how your payments will be applied to the balances with various interest rates. These provisions are typically the same for all credit cards–your payment will be applied to the lowest interest rate balances first.
What does this mean? Suppose you have a card balance of $1,000 at 0% and $1,000 at 13.99%. If you make a $100 payment, it first goes to pay any accrued interest on the $1,000 at 13.99%, and then it goes to pay down the $1,000 at 0%. Therefore, your $1,000 balance at 13.99% will not go down until the entire $1,000 balance at 0% is paid off. This is why I never use a balance transfer credit card for purchases. I even go so far as to cut the card up after I’ve transferred a balance to it at 0%.
Here is the actually language from the Discover More card agreement:
We apply payments to balances with low introductory/special APRs (such as special balance transfer and purchase APRs) prior to balances with standard APRs. Therefore, your savings will be reduced by making additional transactions or having balances with standard APRs. In addition, the length of time the introductory/special APRs will apply to your account may be reduced by the amount of your payments.
Arbitration: Credit card agreements generally include an arbitration clause. This clause means that any disputes between the consumer and the card company get resolved by an arbitrator, not a judge and jury. Having tried cases before juries and arbitrators, I’m partial to arbitrators, but that’s not really what the issue is. The issue is whether you can participate in a class action lawsuit against a credit card company.
In years past, a company could use an arbitration clause to eliminate the possibility of a class action. More recently, courts have not been as friendly to arbitration clauses in consumer transactions that preclude a class action. With that in mind, check out the Discover More card’s arbitration clause:
The Cardmember Agreement provides that we may choose to resolve a claim relating to your account by binding arbitration, in which case you will not have the right to have that claim resolved by a judge or jury and you will not have the right to participate in a class action in court or arbitration. You may reject the arbitration provision with respect to your new account within 30 days after receiving your Card. For restrictions and details, write to us at PO Box 15192, Wilmington, DE 19886-1020.
I have highlighted the key sentence. Why did Discover add this option to the agreement? In my opinion, by giving cardholders the option of opting out of the arbitration clause, they have increased the chances that a court will uphold this provision, and thereby prevent the possibility of a class action lawsuit for those who chose not to opt out. Notice that under the agreement you have just 30 days after receiving the card to make your decision. Whether you should opt out of the arbitration clause is up to you. I don’t, but you should at least know that this option is available with some credit cards.