Avoid the traps of introductory, low interest credit cards

Traps of introductory rate credit cardsHave you received one of those invitations to apply for a low interest credit card? Arm yourself with information before you sign on the dotted line. A few years ago, Greg Lipinski signed up for a couple of those low-interest credit card offers, but what he didn't do was read over the contract to make sure he understood what he was getting into.

"My applications were accepted almost instantly, and I got my cards within a few weeks," Lipinski says. "They even gave me huge credit limits, which I thought was awesome at the time. Then, after a year or so, the APRs skyrocketed, and I couldn't keep up with the payments. My credit was completely messed up."

This isn't unusual. Like many young Canadians trying to find ways to build up a solid credit history, Lipinski fell into the low-interest-rate net that a lot of credit card companies cast. What many won't read when applying for these offers is the fine print -- that the interest rate will jump once the introductory period ends. And if you're not keeping track of when the intro rates expire, you will be caught off guaurd. That can be devastating for those who use their cards freely without worrying about the circumstances. But there are ways to protect yourself from interest rate attacks.

After getting himself into tens of thousands of dollars of debt, and embarrassingly having to ask his mother to co-sign a loan to pay it off, Lipinski went over one of those low-interest credit card offers again and was surprised with what he discovered.

"I was so stoked to get the card, it didn't register that my interest rate would go from 1.5 percent for 9 months all the way up to 29 percent after that! I had three cards with the same awesome initial rate, and used them all, then had no way to pay off what I put on them once the rate skyrocketed. I wished I'd paid more attention."

To make things worse, Lipinski used one credit card to pay the monthly fees on the other, a cycle that may keep your credit history up to par, but will never get you out of debt.

Here are a few things you need to know before signing your name on the dotted line:

Read the fine print before signing up. Those applications you get in the mail do tell you what will happen after their fantastic low-rate period ends. You do have to look for it, and it's written so tiny most of us don't even bother trying to read it, but it's there. Read it! Take the time to understand exactly what the card offers and how things will change after the introductory period ends.

Do your research. By looking on the websites of such big banks as TD Canada Trust or BMO, you'll notice that they do offer lower rate cards for students, businesses or wealthier clients (as low as prime + 1.9 percent), but these rates stay with the card -- they don't change after a specified time and they don't usually jack their rates up unless the client abuses their credit. There's nothing wrong with most of these low-rate card companies -- they help many people reestablish or even start a credit history. Just be careful not to jump on the first offer; find the best one.

Get the best options you can. The best thing to do is to choose the card offering the lowest initial rate, the lowest permanent rate (what it will be once the introductory period is over) and no annual fee. Understanding that these companies, and even the bigwig banks, make money off of interest and fees will help you keep your eyes open to the best available card offer.

Talk to a representative. Don't take the offers on the piece of paper at face value. Talk to someone -- and not just one of the representatives who are trained to talk you into signing up. Talk to a person higher up on the ladder, like a manager. Ask them about their rates and what they'll do for you. Tell them you're shopping around and want the best offer. You'd never walk into a store and make a big ticket purchase, like furniture or a car, without shopping for the best deal. Do the same with your credit cards.

Stay on top of the introductory time period. The rate change will happen without warning. Often they calculate the time from when they accept your application, not when you receive and register your card number. Just make sure what you have on the card is paid off before that rate change occurs so you aren't charged any interest at the higher rate.

From there, the most important thing to do is not to use the card unless you can pay off what you put on it fairly quickly. Don't get stuck in the cycle of only paying the minimum on a huge balance. With high interest rates, the minimum payment barely covers the interest charges. It's hard to get out of that cycle once you're in it. Lipinski learned his lesson: "If I'd known then what I know now, things would have turned out differently. I'd probably still have gone for the low-rate card, but I'd have only picked one instead of three, been more careful with using it, then kept it at zero unless I needed it. Live and learn, I guess."

Written by Lily Wolf.

Updated July 10, 2009

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