I was not amused when I received an offer from the NRA (National Rifle Association) to help the NRA continue its defense of the Second Amendment rights by participating in Visa's service-marked "Maximum Rewards" credit card program.

"It's the card that will help support
your Second Amendment rights"

There is no doubt in my mind that the National Rifle Association is one of the best lobbying organizations in America when it comes to protecting a citizen's Second Amendment rights against the continual encroachment by politicians and others who would deny law-abiding citizens their God-given right to self-protection. There is also no doubt in my mind that a portion of the monies earned by the joint marketing of this Visa card will somehow be committed to the greater good.

The devil is in the details...

But, the question remains, is this card offer superior to other similar card offers and can you really believe the advertising? So let us take a walk on the dark side of credit card agreements and disclosures.

The non-disclosure disclosure...

"IMPORTANT RATE, FEE AND OTHER COST INFORMATION (Summary of Credit Terms)"

Mandated by government regulation, banks and other financial institutions must clearly disclose the APR (Annual Percentage Rate) for monies advanced by a lender.

You will note that the "teaser" rate to encourage you to sign-up for this card is fully and clearly disclosed. Since the teaser rate is available to all new customers, there is no further consideration of this issue required.

However, you will note that your actual percentage rate after the teaser period of 6 billing cycles is not actually disclosed and can be anything between 9.99% APR and 17.99% APR which is why we term this a non-disclosure disclosure. The weasel words "depending on how you meet our credit criteria" followed by the footnote designators insure that your credit rate will only be known after you apply for the card. After that, it becomes a "take it or leave it" choice -- which if you decline the card -- may be noted on your credit bureau report and negatively impact your credit scores.

"Annual Percentage Rate (APR) for Purchases"
"0.00% APR fixed for the first 6 billing cycles after your account is opened.^† After that 9.99% APR, 13.99% APR, or 17.99% APR as of 02/01/2008 depending on how you meet our credit criteria.^†*"

WOW: 0.00%...

The  innovative industry marketing ploy of a 0% teaser rate offer is said to be the brainchild of Andrew Kahr, an industry credit card consultant who realized that in a world of competitive offers, a zero percent rate was a surefire means to attract your attention and get you to open the envelope. Even though the teaser rate will be honored by the credit card issuer through the specified period, the fine print makes it perfectly clear that if you miss a payment, go over limit or bounce a payment check, the teaser rate can instantly convert  to the highest rates allowed by law.

The disclosure goes on to state that there  is a different rate 3.99%) for balance transfers and the teaser rate is only available for three billing cycles instead of the six billing cycles mentioned for the teaser rate. It is as if the bank is relying on your first impressions of the advertising BOLD print and counting on the fact that you will let the rest slide under the radar. And again with the weasel words, "depending on how you meet our credit criteria."

"Other APRs
Balance Transfer APR: 3.99% fixed for the life of the balance on Balance Transfers made in the first 3 billing cycles after your account is opened.^† After that, 9.99% APR, 13.99% APR, or 17.99% APR as of 02/01/2008 depending on how you meet our credit criteria.^†*"

But notice the exorbitant rate of interest for cash advances, especially if you should meet any of their default or penalty provisions...

"Cash Advance APR: 23.75% as of 02/01/2008.^†*"

"Penalty Rate APR: up to 31.75% as of 02/01/2008 (see explanation below).^†*"

Again each item carries a footnote often indicating more unpleasantness to come rather than a further explanation of the footnoted item.

Maximizing their returns...

It is in the best interests of all financial institutions to maximize the rate of return on their capital investment. Therefore, they will link your cash advances and transfers to some floating index which moves up or down in synchronization with another financial rate such as the Prime Index, LIBOR (London Inter-Bank Offering Rate).

"Variable Rate Information
The APR for Purchases and Balance Transfers may vary and will be the greater of 9.99% or the Index plus a Margin of 4.50%,* or the greater of 13.99% or the Index plus a Margin of 8.50%,* or the greater of 17.99% or the Index plus a Margin of 12.50% depending on how you meet our credit criteria.* The APR for Cash Advances may vary and will be the greater of 19.99% or the Index plus a Margin of 18.50%.* The Penalty Rate may vary and will be the Index plus a Margin of up to 26.50%.*"

One, note that they do not disclose the "Index" that will be used which may be a significant flaw to the disclosure process. And two, note the use of multiple and widely varying  rates along with the use of the words "or the greater of" to insure that you are always receiving the "maximum rate." And again note the weasel words "depending on how you meet our credit criteria."

Take a moment and pre-compute what the penalty rate may be by using a rate of 6% plus the margin of 26.5% for a total rate of 32.5%. Multiply that by your outstanding balance and re-think your overall debt load.

There is no grace for the unforgiven...

"Grace Period for Repayment of Balance for Purchases
Not less than 20 days from the date of the billing statement on new purchases (provided you have paid your previous balance in full by the due date)."

Again, the devil is in the details. Not less than 20 days from the date of the billing statements -- "provided that you have paid your previous balance in full by the due date." One may wonder if the billing statement date is actually the mailing date, which means that any grace period is shortened by the amount of time that "snail mail" requires.

Some credit card processors have been known to pick up their mail late in the day to add a "processing day" to the equation in the hopes of making a statistically significant number of clients pay their late fee and further subject their account to higher rates.

"Method of Computing the Balance for Purchases
Average daily balance (including new purchases)."

Again, another non-disclosure disclosure.

The methods for computing the average daily balance vary widely and may be computer on a one-month or two-month basis. Or you may find that your payments are automatically allocated to the charges that carry the lowest rate first, prior to being applied to the higher rate charges.

"Annual Fee
None."

"Minimum Finance Charge
$1.75 (any billing cycle a finance charge is imposed)."

Considering that this is not a so-called prestige card like those issued by American Express, paying for the issuance of the card should not be a determining factor in your decision as you should expect no annual fees.

The most profitable play in foreign exchange...

"Foreign Currency Transaction Fee for Transactions made in Non U.S. Currency
3% of the amount of the transaction (after conversion to U.S. Dollars)."

While a financial institution's foreign exchange traders are risking large sums of money in the hopes of making a profit or avoiding currency translation losses, this type of foreign exchange transaction is always a winner for the credit card companies regardless of the currency rate in effect since it is an "ADD ON" fee. 

Since most people do not extensively travel abroad, this item rarely catches their attention. However, in today's Internet age where vendors may be located almost anywhere in the world, do not be surprised to find that this charge will be applied to some of your Internet purchases.

Paying for the privilege of cash IN ADDITION to the interest rate... "Discourtesy" checks.

"Transaction Fee for Cash Advances
The greater of $15 or 3% of the transaction (the greater of $15 or 5% of the transaction for certain "Cash Equivalent Transactions")."

"Transaction Fee for Balance Transfers
The greater of $10 or 3% of the transaction."

You know those courtesy checks that appear in the mail prior to tax day and Christmas, they are actually what I call "discourtesy" checks because they trigger this cash advance feature. Ditto when you use these checks to pay-off another creditor.

Exceed your line -- pay the fine!

"Over Limit Fee
$39"

While the credit card companies waffle on about the additional risk of credit default by a creditor who has maxed out their cards, in reality, "fee and penalty" income is often the largest bottom-line profit maker for financial institutions. 

"Late Payment Fee
$35 if your New Balance is less than $500; or $39 if your New Balance is equal to or greater than $500."

Ever wonder how the bank decides how much to charge you for penalty fees? Simple, the fees, in and of themselves, often bear no resemblance to the additional risk or loss of funds that they are associated with because they are often determined by focus groups and other market research techniques to be the maximum allowable charge that will not upset a customer so much as to immediately change their credit card issuer. Although, each issuers secretly hopes than some other issuer will make you mad enough to use their "discourtesy" checks to pay off your old balance and switch accounts.

Meet the devil ... disguised as a "^†" footnote...

^"† Your Annual Percentage Rates (including Introductory Rates, Preferred Rates or Special Offer Rates) may terminate and increase to a Penalty Rate or a Preferred Rate if you: (1) fail to make a minimum payment to us when due; (2) exceed your credit limit with us; or (3) make a payment to us that is dishonored for any reason. Factors considered in determining the higher rate may include how you have handled your account with us and current and historical information regarding your credit in general."

Items (1), (2) and (3) -- bingo: pay the issuer

Slip up and your entire account is going to be charged at the highest rate legally allowed in your state. Which brings up another sore point with me. Have you ever noticed that some interest rates are constrained by state law and that you always live outside of one of those rate- and fee-limit states?

And just when you thought it couldn't get any worse: the Universal Default Provision...

Note the innocuous section that states:

"Factors considered in determining the higher rate may include how you have handled your account with us and current and historical information regarding your credit in general."

and ask if your credit card issuer is applying the UNIVERSAL DEFAULT provision to your account. This methodology allows the credit card issuer to raise your rates to the default maximum if you have been late or have defaulted on any other credit card or payment reported by one of the major credit bureaus -- even if your credit card issuer is not associated in any way with the other defaulted account.

And this is not the end...

The information in this disclosure may be overridden by any subsequent disclosures that you receive with your credit card or with your statement. The terms are always subject to change without notice. And all changes are unilateral; that is, made by the credit card issuer without your input, permission or agreement.

In no other business can you change the terms on past purchases...

One of the greatest dangers in dealing with credit cards is that the issuers can change the rates on your past purchases with impunity. This is not done in any other area of banking. If you are late on your mortgage or car payment, you may be assessed a late fee... but your interest rate remains the same. Which is not true of your credit card transactions. Those items which were purchased when your rate was 9.8% are now being charged at 20-30% after a default trigger. And it is all perfectly legal due to the credit card company's Congressional lobbying activities. It appears that your elected officials would rather sell out their constituencies than disappoint the special interests who contribute support and money to a legislator's campaign.

Hobson's Choice...

In the final analysis, you choose to be screwed and your only recourse is not to use the card, use the card wisely or switch to an issuer with better rates and terms.

The best revenge...

The best revenge is to live well, live within your means, use credit sparingly and pay off your balances in full. Of course, you may still be paying a price for credit as the merchant charge for using a credit card is often reflected in your final bill. Which leads us to recommend that you ask the merchant for a 2-3% discount if you pay with cold, hard cash. And if they say no, it is a matter of nothing ventured, nothing gained.

To the NRA's credit, they highlight the major terms and reinforce that you must be responsible with your credit by making timely payments, etc.

What can YOU do?

Recognize that you are allowing yourself to be screwed by a financial institution when you do not read and, more importantly, understand what you are reading and how it applies to your financial situation. It's all there somewhere to keep the institution out of regulatory trouble.

Recognize that most offers made by organizations under "affinity group" arrangements inherently make money for the organization, both from advertising and marketing activities as well as an ongoing revenue stream from your continued use of the service offered. Somehow, this part of an organization's disclosure to their members is often overlooked and may only be known to the organization's top officials.

Recognize that there is no inherent advantage in selecting one financial product over another since money is a commodity. Therefore, the only consideration that should be given to the selection of any financial product is that you get the most favorable rate and terms possible under your particular financial situation (credit rating). Informed shopping is a must.

Always ask your credit card issuer to waive fees. Most will want to keep your business and will waive an infrequent late fee and all will almost waive any charge for their card. After all, it is in their best interests to keep your revenue stream.

Always keep a copy of your credit card application and all of the materials that are associated with the account in a folder.

Always read your credit card statement fully and completely to determine if your rates have been changed without notice.

Whenever possible, payoff your credit card balances in full or keep your credit balances as low as humanly possible.

Demand that your elected officials eliminate the "universal default" provisions and support legislation which mandates that only new purchases made after a rate change are subject to higher rates. Request that fees be restricted to more reasonable amounts that can be justified in terms of processing costs and not just serve as another card issuer profit center. Enact severe economic and legal penalties for those who attempt to game the system to make consumers wrong by staging their mailing or mail handling procedures to convert on-time payments into past due fee income. Such as setting the due dates on Sundays or Holidays in the hopes that a statistically significant number of people will remit late payments.

Beware of credit card issuers who want you to think that you have additional power because they let you add your own picture to the card, select the initial rate, decide on a bonus rewards plan. Realize that every choice leads to their unilateral determination of the final rates -- especially should you be late with a single payment, have insufficient funds covering your payment check or exceed your limits. You will discover (no pun intended) that that smiling face fronting their commercial turns into the scowl of an impersonal, hard-hearted computer terminal attached to a no-nonsense person whose compensation is directly dependant on how much money he can wring out of your overextended wallet.

Watch out for "unrewards" cards that feature bonuses restricted to narrow categories with the remainder of purchases earning a significantly lower rate. Also watch out for expiring bonuses -- it may take some people longer to accumulate the points they need to a desirable purchase; only to find that their points fully or partially expired before they could use them. Watch for dollar bonus caps on rebate programs which limit the effectiveness of the program. Watch how the card issuer defines your category of purchases: groceries purchased at mini-marts or even at large stores such as Wall-Mart may not be correctly classified -- leading to loss of any bonus points or rewards. Be extra careful with rewards programs becuase all rewards can be wiped out with a single late payment or bounced check charge. Check the fine print when choosing a rewards card. Since many rewards cards carry higher interest rates, they make the most sense for people who are known in the industry as "deadbeats," those who pay-off their card balances in full each month. Those that carry a balance are known as "revolvers." In some Orwellian sense, it is better to be thought of as a deadbeat by the card issuers.

Warning: maximizing your card purchases on a single card could negatively impact your credit score. Credit score algorithms sometimes rank the percentage of card use and may consider 60% or more monthly purchases when compared to your card's credit limit to be an excessive use of credit. And speaking of credit scores, watch your employer reimbursement program. If you routinely charge large amounts to your card for business purposes and then are reimbursed by your employer, accounting-wise you may be OK. But your credit score may be negatively impact if your total credit purchases exceeds your stated income. This is also may be an audit flag for the IRS.

A warning about so-called "debit cards:" Even though they may carry the logo of a well-known card issuers, they are a direct pipeline into your bank account and do not have many of the protections that have been legislatively mandated by Congress. Yes, you may get your money back if the card is improperly used -- but only after a long and often arduous fight with your bank. With credit cards one can simply "refuse" the charge and the matter is thrown back in the hands of the merchant as a "chargeback." With debit cards they already have your money and may be disinclined to remedy any legitimate complaint you may have. We do not recommend the use of debit cards -- especially for Internet purchases. Banks and credit card issuers love debit cards as they are often the reason for fee-producing overdrawn accounts and the bounced card payments which trigger additional fees and interest rate hikes.

Always review your credit report at least once per year -- and the best news is that all credit bureaus must provide you with one free report. Warning: watch out for those groups that try to make your "free credit report" contingent upon purchasing their monitoring or other services. For your free credit reports, visit the Federal Trade Commission for details.

-- steve

Quote of the day: "If you don't ask, you don't get." -- Steve's Beloved Parents 

A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius

Reference Links:

NRA Maximum RewardsSM Visa® Card Credit Card Terms & Disclosures