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| The Basics | How credit card companies slip in extra fees
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For a perplexed reader, Liz Pulliam Weston explains how credit card issuers wring extra money from those who pay their balances in full.
By Liz Pulliam Weston
Dear Liz: For the past nine years I have been using a platinum credit card that offers frequent flier miles on my favorite airline. Since I got the card, I've always paid the balance in full so I wouldn't have to pay interest. But last month, I noticed a $1 "finance charge" added to my bill. When I called to inquire about the fee, I was told that they had changed their policy and had eliminated the grace period. I was sent a card-member agreement, which an attorney would find hard to comprehend. It supposedly explained the change. Can a bank alter its rules whenever it wants and legally levy a finance charge on an account, even when the balance is paid in full?
Answer: The short answer is yes. Credit card companies can, and do, change the rules all the time. Generally, they only have to give you 15 days' notice to alter the terms originally promised.
The great rate you thought was fixed for life? Oops, never mind. Your credit card company has decided it will be variable from now on. The minimum payment you were counting on? Guess what: it just doubled. Went on vacation and forgot to make a payment on one card? The interest rates on all your cards, not just the unpaid one, can skyrocket.
In the past, the folks most vulnerable to these shenanigans have been the ones who carried credit card balances -- which, as you well know, isn't a smart thing to do. But credit card issuers have been trying to find ways to profit as well from "deadbeats" like you -- "deadbeats" being the industry term for customers who pay their balances in full, depriving the card companies of profitable interest payments.
One way to wring extra cash from you is by eliminating the grace period, which is the time customers are usually given to avoid interest charges by paying their balances in full.
Related news and commentary on MSN Money
You may decide that this change, while annoying, isn't reason enough give up your card. Or you can look for another card, one that is affiliated with a different airline or that has a "travel rewards" plan that can be used on a number of carriers. Frequent-flier Web sites like InsideFlyer.com and WebFlyer.com can help you find possible alternatives.
Dear Liz: I was kind of alarmed to read the letter from the reader who said she shredded her bank and credit card statements. (She was asking what other documents she should shred to reduce the chances of identity theft.) I was under the impression that one should hold on to bank statements for a period of time in case you're audited by the IRS. Is that no longer true?
Answer: Most people don't need to hang on to bank or credit card statements for the simple reason that they don't itemize their taxes. If you don't need the records to support a deduction or other tax break, there's generally no reason to hang on to them once you've reconciled your account.
Even if you itemize, you don't have to retain the physical piece of paper. Financial institutions are required to keep your statements for at least six years, by which time your risk of an audit is virtually nil. If you want to keep your records longer, or are worried about your bank charging you a fee to access your old statements, you can always download the statements to your computer (being sure to make regular back-ups, of course).
You may want to retain paper records, however, if that's what your tax pro requests. The IRS for years has accepted electronic records, but not all tax preparers have moved completely into the 21st century. You could well decide it's more important to keep your pro happy than to reduce your paper piles to the absolute minimum.
Dear Liz: I have heard having a credit card almost maxed out hurts your credit score. Is there any advantage to spreading out a balance over several cards? I have four cards; each has a $20,000 credit line. One of the cards is near its limit, but has a very low interest rate. The others have no balances and higher interest rates. Should I transfer some of the balance to the higher rate cards?
Answer: You're correct that it's better for your credit score to have smaller balances on a few cards than one card that's near its limit. If your credit score is low and you can't pay off the balance immediately, it might be worth spreading the balance around.
But the low rate you have indicates your score is already pretty good. In that case, the smartest option is to use the good rate to help you pay the balance down -- and preferably off -- as quickly as possible. (For more articles on credit scores, see the Protecting Your Credit Score page.)
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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