John and Lucille Gravelle pay off the balance on their credit card each month and were particularly interested a couple years back when they learned about "no annual fee" credit cards.
They could continue to pay off their balances and wouldn't get socked for annual fees, typically $15 to $40, depending on the features the card offers.But when the Gravelles, who live in St. Paul, Minn., began calling banks advertising "no annual fee" cards, they learned that not all such claims are created equal.
One bank informed them that "no annual fee" meant only for the first three months they held the card, while others waived the fee only for the first year.
Eventually, the Gravelles found a card that really didn't have an annual fee. It was issued by Security Bancorp, of Southgate, Mich.
In the highly lucrative credit-card market, banks and savings and loan associations have developed a variety of come-ons to entice you into taking their card, and not all of them are what they're cracked up to be.
Besides the "no annual fee" promotions, other offers allow you to skip a payment, promote rebates on purchases, or push interest rates that at first glance appear low.
"The issue is clarity. The customer is rational and needs to know the features and the benefits that they are purchasing and the price they will pay," said Darryl Hansen, president of Norwest Card Services of Des Moines, Iowa. "We pick up marketing materials and you occasionally see deceptive claims."
Robert McKinley is publisher and editor of RAM Research, a Frederick, Md., newsletter that follows trends in the credit-card industry.
McKinley has collected some of the most common come-ons, and what may lurk behind them. Here are some of his top picks:
- "No annual fee." Watch for promotional offers in which the annual fee is waived only for a year or less. Two such offenders, McKinley said, are Equitable Bank of Dover, Del., and Provident Bank of Maryland, which advertise no annual fee but only for the first year. One interesting twist, said Hanson of Norwest, is that the card issuer charges a "minimum monthly service charge" in lieu of an annual fee, but over 12 months it equals or surpasses the annual fee.
- The "skip-a-payment" option. Nice, huh? If you can't make a payment in a given month, skip it and come back the next month. But what the advertising sometimes doesn't tell you is that in almost all such offers, the interest charges on outstanding balances continue to accrue on your unpaid balance.
- "We've got the lowest interest rates." That also sounds like a good deal, but make sure you check the annual fee, which could be higher than others. And check the grace period and any monthly service charges, said Hanson. Many card issuers offer a grace period of 25 days from when the bill is sent to when payment is due to pay off the balance without interest. The grace period assumes there was no balance carried forward from the previous month.
- "Convenient cash advances." Yup, but watch out for the costs. McKinley cites California First Bank of San Diego, which has been promoting its cash advance feature but like other banks charges 19.8 percent on advances, plus a one-time cash advance fee of 4 percent. That would result in $17 in finance charges for the use of $300 for one month.
- The free credit card come-on. First National Bank of Omaha, McKinley said, promotes a "free" credit card. While the card has no annual fee, it does charge 21.9 percent interest, without a grace period on purchases, meaning that as soon as the bill for a purchase is posted to the account, the bank begins adding interest charges. As long as you pay the bill off each month, the maximum interest charge is $1.75. In other words, McKinley said, the card is free only if you don't use it.
- "We offer lower rates for our customers." McKinley notes that AmSouth Bank of Birmingham, Ala., will lower its 17.9 percent interest rate to 14.9 percent if you open a deluxe checking account with a $100 minimum deposit. That's fine, but then they'll sock you $6 a month for checking account maintenance, an amount that quickly eats up any savings on the card.
- "1 percent rebate on purchases." That's nice, too, McKinley said, citing a program offered by First Deposit Bank of Tilton, N.H., but "any card charging 21.9 percent can justify a card-holder rebate."
Discover card, offered by Sears, also offers a 1 percent rebate on purchases but charges 19.8 percent on all outstanding balances, also high in his view.
McKinley offered these hints in choosing a new card:
Be wary of credit-card solicitations. These cost money, and you'll rarely be solicited for a bargain card.
Stick to your needs. If you use your card for cash advances, ask if there's a charge for this. If you pay off your balance each month, look for a no annual fee card.
If you normally carry a balance on your credit card, forget about the grace period and focus on cards offering a lower interest rate and a reasonable annual fee.
What a lot of people don't know, McKinley said, is that the grace period on most cards is eliminated as soon as you begin carrying a balance from one month to the next. In other words, if you skip a month in paying off your balance, most banks begin to assess interest charges on all new charges beginning the day they are posted to the account.
Know a good deal when you see one. The average credit-card interest rate is 18.23 percent, and the average annual fee is about $17. An interest rate under 16.5 percent is a good deal; so is any annual fee below $15, he said.