7 Credit Card Traps

Both as a small business owner and homemaker, I have often found credit cards helpful. Trying to get my small business off the ground, credit cards gave me the capital I needed, just as after my divorce they kept food on the table and a roof over my head. But 15 years of paying with plastic also taught me the dangers of credit card traps and how to avoid them.

Application and Balance Transfers

Many credit cards offer attractive low interest rates on balance transfers when you first apply for the card. There are two credit card traps to avoid here. Be sure to include your balance transfer request with your application, and be sure to transfer funds from a credit card in your name, rather than a spouse, as the loan officer reviewing your application will see that your debt-to-income ratio will remain unchanged, which will increase your chance of being approved.

Fixed Promotional Rates

Fixed promotional rates on balance transfers may mean two things: That the rate will remain the same until the debt is paid off, or that it will remain fixed for a certain period of time. To avoid this credit card trap ask the customer service representative helping you with the balance transfer whether the fixed rate applies "for the life of the loan." Otherwise, find out when the rate will expire and what the new rate will be.

Variable APR Rates

Many credit card accounts have a "variable" interest rate based on the Prime Rate (dictated by the Federal Reserve's Fund Rate) and the additional rate assessed by the credit card bank. Given this, a variable rate may rise whenever the Federal Reserve raises interest rates, or when your credit card company determines to increase your APR. This credit card trap can be avoided by applying for a credit card with a fixed APR, or balance transferring to a fixed APR promotional rate.

Transaction Fees

Transaction fees have become more common and expensive in past months. Most credit card companies that offer attractive balance transfer offers also often charge a transaction fee of between 3% to 5% of the total amount transferred. This fee is added to your total debt at the moment of transfer. To determine if this credit card trap is one you should avoid, make sure that your new interest rate will be lower than your old one by at least 3% or 5% (depending on the transaction fee). In addition, plan to leave the debt with the same credit card for at least one year, since your APR savings are calculated on a yearly basis.

Membership Fee and Cash Back Bonuses

Today most credit card companies offer cards with no membership fee and with at least a 1% cash back bonus. Avoid credit cards that require membership fees unless other services like life insurance, travel insurance or higher cash back bonuses make the membership fee worthwhile.

Hidden Information

A common credit card trap involves the confusing presentation of information. When you receive balance transfer offers or checks from your credit card company, look for an asterisks symbol or a cross symbol near the promotional balance transfer rate. If there is one, look for the full disclosure of information at the bottom of the page, on the back of the page, or on another page that came with the offer. There you will see whether transaction fees are associated with the promotion and for what duration the promotional rate is offered.

Pay Off High Interest Debt First

Until the Credit Card Accountability Responsibility and Disclosure Act of 2009, credit card companies would apply your monthly payments to your lower interest rate loans first. Many consumers are not aware that this is no longer the case. You can now make use of balance transfer promotional rates even if your credit card has a high interest balance on it already. When you send your monthly payments in they will apply to the higher interest balance.