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Read the fine print on credit-card documents

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By Steve Bucci | Saturday, May 03, 2008 | 6 comment(s)

Q: I have one credit card on which I make a monthly payment of about $1,000 to $1,500. My balance is about $5,000.

Last year, I needed to use one of the checks they regularly send me and wrote out one for $370.

When I attempted to send a separate check to pay this off, I was told I had to pay off the entire balance for purchases on my credit card before any amount would be used to pay down the balance on my check. I wrote to customer service and was told the same thing.

I further looked at my last statement and saw something I could not believe — my check for $370 is now showing a balance of $1,833.33 at an annual percentage rate of 22.99

percent. In contrast, my credit-card purchases are at 8.99 percent APR.

I cannot believe this is legal in the banking industry. Because my balance is about $5,000, I can only imagine what the balance on my $370 check will be when I finally pay off the purchases portion of my bill.

I have decided to use my card as little as possible to bring my account down to zero.

Do other credit cards use this type of “program?” Are people as dumb as I’ve been? How can we stop this?

A: If misery loves company, you can take some comfort from knowing you have a lot of company.

I know you don’t want to hear it, but from your card issuer’s point of view, it is

providing you with a “convenience.” The company disclosed the terms of the convenience check in advance and in writing.

Like many millions of others, you just didn’t read what you agreed to. I believe this is a part of the American psyche — we are all born with a gene that allows us to ignore (with impunity) assembly instructions, directions and our doctor’s advice.

Back to your question: Yes, all cardholder and other borrower agreements include terms detailing how payments are applied and, not surprisingly, they can be expensive if ignored. For example, I had a deferred payment plan on some furniture recently. If I paid by May 1, there was no interest. If I paid on May 2, I’d have to add $1,500 in finance charges.

Just to be safe, I paid on April 1.

No, you are not dumb. Like many others, you just don’t pay enough attention to the fine print of your credit-card agreements.

And it’s not all your fault. Personal financial education is rarely taught in schools and parents would rather talk about sex education with their kids than how much they make or what they spend it on.

However, it is mostly your fault. So, since I can’t fix all the schools today, the next-best thing I can do is suggest that you and my readers very carefully review any financial agreements (especially the minuscule type) and understand all the terms before using them.

Now, for the good news. The lesson you have learned regarding your convenience check was really cheap. There are about 1 million or so people who didn’t read their mortgage agreements and are now losing their homes, second homes and minds.

You should consider transferring the entire balance from the current card to another card, loan or line with a better interest rate. That way, you will be paying the same lower interest rate for the entire balance.

Keep in mind, however, that I want you to read your new agreement.

Steve Bucci is president of Money Management International Financial Education Foundation.