Creditors and financial institutions are always drawing up plans to increase their revenues. Most of the time, consumers like you fall prey to their hidden charges or confusing rules. This is why a lot of you doubt whether the creditors can actually resort to such mischievous loan origination tactics or not.
To help you make smart decisions, I have discussed five of the most popular misconceptions related to credit and the banking practices observed in our country.
Myth 1: Credit card companies cannot increase the rate of interest on my cards.
Fact: Actually, they can. However, the CARD Act has been put into place to protect you from their most horrendous abuse, i.e., they can no longer hike the interest rate on your card’s existing balances without you being 60 days late in making the payments. Still, there are certain loopholes that you must be aware of like:
- Rate of interest on credit card’s are variable and that they are always dependant on their prime rates. So, the interest charges on your balances will not increase any further unless the interest rates go up.
- You could be slapped with higher interest rates, depending upon your creditworthiness and payment history. If you pose higher risk to the creditors’ money, then you’ll be charged with higher rates of interest on all your future transactions.
- Your creditors can increase the interest rates on your cards for practically any reason after a 12-month period. However, the new, increased rate will only be applied to future purchases and not on the present balances. For that too, your credit card issuer, is bound to notify you at least 45 days ahead of any change in your cards’ rate of interest.
One of the most effective ways to resolve this of kind credit problem is to get your balances transferred or to payoff your dues through a personal loan, but make sure you are never made to pay as per the purchase annual percentage rate (APR).
Myth 2: Credit card payments are always used to pay off the highest interest incurring debt first.
Fact: This isn’t always true. Creditors use different rates to charge different kinds of transactions. The rate of interest on a purchase (is high) but then, it differs from the balance transfer that is basically low. Now, with the advent of the CARD Act everything such thing has changed. The payment made by you must be applied to the highest interest rate balance first. But, your payments should be greater in value than the minimum outstanding balances.
So, if you make minimum payments every month, then your money will be used to pay back the lowest interest rate balance first. The best tip would be to avoid having balances transferred and spend money from a single credit card. Frankly speaking, banks usually get to have your balances trapped when there are multiple kinds of balances incurred in a single credit card.
Myth 3: Every zero percent offer means the same.
Fact: No, all such credit card offers aren’t. A huge difference exist between a zero percent APR credit card and a zero percent purchase financing. Former is actually a balance transfer card wherein you’ll not be charged any interest on all your purchases for certain period known as the promotional period, whereas, the latter will defer interest from getting applied to your balances in some chosen departmental or retail stores.
In case of deferred interest credit cards, make sure you’ve paid off all the balances before the expiry of the promotional period because if you don’t pay off the balances within the said period, then you’ll be charged interest for the entire promotional period. Similarly, zero percent APR credit cards either have their interest reduced or stayed during promotional period. This is one of the most suitable ways to wipe out your overwhelming credit card balances and stay financially healthy.
However, as soon as it is over, the interest on their balances increases drastically. So, be careful with your use of these offers and always make it a point to pay off all the bills before the promotional period expires, as it might take you years to repay them all.
Myth 4: Closing credit card accounts will increase my credit score.
Fact: Actually, canceling old credit card accounts or any other debt is never a good idea to promote your credit score. People have the misconception that old debts look ominous to potential lenders. But, it is a lot better to pay off your bills on time and not missing a deadline than to keep a card with $5,000 available as credit lying idle in your closet.
So, basically its foolish to wipe out old credit card balances by having them cancelled. This is because old credit card accounts will elongate your credit history that plays an important role in improving your credit score. It would help creditors to evaluate whether you can manage your financial obligations responsibly or not. However, there are certain acceptable ways to have old debts removed from your credit report, if you’re hell bent on doing so.
Myth 5: Credit card issuers don’t provide any freebie to college students for signing up for their cards.
Fact: This is not always true. Though credit card companies are barred from doling out freebies like T-Shirts in front of schools, as per the CARD Act, yet that doesn’t stop them from signing-up students for the sake of bonuses. They can even promote their services/products on campus. Still, the practices isn’t good for students, as they are asked to spend with the lure of getting a free gift on every purchase they make. This is much worse than getting a T-Shirt for signing up.
Myth 6: I am protected from any kind of credit card or debit card fraud.
Fact: Not necessarily. In order to defend yourself against a credit fraud, you must report such an incident within 60 days of its occurrence. Or else, you’d lose a lot of your rights. In case of ATM/debit cards, banks can hold you responsible for not more than $500 in fraudulent transactions, provided you’ve notified them about the incident after two days of it from happening. On the other hand, credit card companies will not hold you liable for a fraud of not more than $50. There are some banks that waive off a fraud of $50 altogether.
If you are charged and held liable for credit frauds, then you’ll have to make the payments and in turn have your credit rating damaged. However, you can work to improve your credit score after negative trade lines like payment defaults, credit frauds or bankruptcy is reported against your accounts.
Whatever be the case, it is your responsibility to avoid any kind of liability. Always keep a record of your transactions and inform the concerned personnel of the bank or the creditor, the moment you detect any suspicious activity. Moreover, guard your confidential financial details and never share your Personal Identification Number (PIN) with anyone, or keep an easy, obvious one.