What's the scariest thing in your wallet? It might be your credit card – and not just on Halloween. Frightening offers, terrifying terms and petrifying practices still exist in the world of plastic. See what you need to beware of.
Bad deals for bad credit
If anyone needs a break, it's somebody who has had financial trouble. But some credit cards marketed to consumers with a poor financial record are being thrown a life preserver with an anchor attached.
"Credit card issuers are picking up the pace in issuing cards to subprime borrowers," says an incredulous Susan E.S. Howe, a Philadelphia-based CPA and a member of the National CPA Financial Literacy Commission. "Credit card issuers are once again engaging in risky behavior in terms of giving cards to people with a higher chance of defaulting."
Again, marketing to default-prone people isn't by itself a terrible thing. It can be quite admirable. There's a market out there for underleveraged consumers. But as The Wall Street Journal recently reported, subprime customers are being offered lower credit lines for higher interest rates.
CardRatings investigates hundreds of credit card offers and weeds out the ones that include deceptive marketing practices to help you find a secured credit card that can help rebuild credit without onerous terms and conditions that will creep up behind you.
Deferred interest charges
A lot of health-care-related credit cards have come on the market in recent years. Unfortunately, some of these cards, as well as medical professionals, were roundly criticized in the media for some of their marketing practices.
As Chuck Bell, program director for Consumers Union, told Bloomberg BusinessWeek last year, "We are concerned that some health-care providers are aggressively marketing these high-interest credit cards to patients without providing appropriate disclosures, protections or refunds."
GE Money's CareCredit, one of the best known of the bunch, offers a deferred interest plan, in which a major procedure such as dental surgery can be paid with credit, with no interest charged if paid off within a designated time period between six and 24 months.
The zero interest loan is, of course, a fantastic deal if you pay your balance off in time. If you don't, it's a little like having a financial hand grenade blow up your bank account. Even if you're just a day or two late, and only owe another $20, all of the interest from day one will come back to haunt you.
Unexpected drop in credit limit
While reducing credit limits has been happening since the Great Recession began in earnest in the fall of 2008 (technically, it started in December 2007), the practice is growing. Todd Mark, vice president of education for the Consumer Credit Counseling Service of Greater Dallas, has seen a lot of it among his clients in recent weeks. Mark says that credit card issuers seem to randomly cut a consumer's credit line.
"They've always had the ability to do this, but we're seeing it more often, where if something's not being monetized or useful, the banks are getting rid of it," says Mark. When that happens, he says, it can have two unpleasant consequences for the consumer.
Your emergency fund could vanish. Mark doesn't recommend relying on a $10,000 credit line for emergencies instead of putting $10,000 into a savings account, but many people do it anyway. "When a credit line is suddenly cut dramatically," he says, "it removes a lot of peace of mind and can be terrifying for some people, where they suddenly make rash financial decisions, and not always for the positive."
Your credit score could tank. Mark explains that if you have $10,000 in available credit and have $3,000 in debt on your credit cards, that's considered a perfectly fine credit utilization ratio--that is, the amount of debt you use versus the credit you have. Lenders naturally like seeing that you're using your credit cards responsibly. But watch what happens when a credit issuer lowers your credit limit.
"If your credit line is dropped from $10,000 to $4,000, your credit utilization ratio is at 75 percent, not 30, and it immediately drops your credit score, and it can be devastating," Mark says. "It's one thing if it's dropped due to a consumer's behavior, but when this is done arbitrarily, it makes consumers look bad, and of course, it may impact their qualification on a mortgage or a car loan or how potential employers look at them - even though they didn't spend one cent more."
One strategy for making this scenario less likely is to regularly pay off your balance, or at least pay more than the minimum. If your credit card balance is steadily creeping up and you're only paying the minimum, your bank could be spooked into thinking financial trouble is around the corner, and decide to cut their potential losses.
Goblins, ghosts and scary credit cards
So when the clock strikes 6 p.m. this Halloween, you can expect neighborhoods to be flooded with kids begging for candy, and amidst the Harry Potter and Smurf costumes, there will certainly be some little witches and goblins and ghosts trying to scare people. But if you really want to frighten someone, you should toss aside the werewolf mask and suggest your kid dress up as a credit card with a 29.99 percent deferred interest rate.
Correction, Jan. 17, 2012: According to John Ulzheimer, president of consumer education at SmartCredit.com and an expert on the FICO score, the ideal percentage of credit utilization
is not 30 percent, but from 1 to 10 percent.