Credit and charge cards are everywhere. The average consumer holds nine cards, and the average balance on bank credit cards is $2,000, according to Bankcard Holders of America, a Virginia-based consumer group.
Despite the drop in interest rates in the economy in general, credit card interest rates range from 12 percent to 21 percent.
If high interest rates were not burdensome enough, Bankcard Holders of America has found some hidden costs of bank credit cards. These include:
* Misleading interest rates. When banks state their Annual Percentage Rate, the rate is computed as simple interest -- interest on purchases not paid in full each month. But in fact, interest is compounded: You pay on purchases, and interest nTC charges are carried forward each month.
* Phantom grace periods. If you carry a balance (70 percent of all consumers do), your grace period is usually forfeited on all new purchases. Interest accrues not only on the balance carried from the previous month but also on new charges from the date of purchase.
* Backdated interest. Banks used to charge interest from the date a charge was posted. Now, most charge from the date of purchase.
* Costly balance calculation methods. Many banks charge interest based on the average daily balance instead of on the balance owed. Say you charge $1,500 on your card and pay $1,200 on the due date. When your next bill arrives, you will probably be charged interest on the $1,500 average daily balance from the previous month, not merely on the $300 you still owe.
* Cash-advance gouging. Most banks charge interest immediately on cash advances and add a fee of about $2.50. If you withdraw $300 (the average cash advance) and pay the fee, plus 18.5 percent from the date of the withdrawal, you will pay an effective annual interest rate of 32.94 percent.
How can you avoid such charges?
If you normally carry no monthly balance, shop around for a card with no annual fee or grace period.
If you carry a balance most months, look for a card with the lowest interest rate and the most favorable billing method.