Lenders want to make a profit. Where does their profit come from?
It comes from you: the consumer. While most of a lender’s revenue is “above board”, coming from monthly interest that you’re expecting to pay, some of it can come as a surprise. Many lenders make money by adding surprise expenses that you’re legally obligated to pay, since it was buried in the fine print of your contract.
Fortunately, you can avoid most of these expenses if you’re aware of them. Let’s take a look at a few of these unexpected expenses, and how to avoid them.
Life Circumstance Insurance (Synchrony Financial)
There are several credit card companies that offer “insurance” for life circumstances.
Synchrony Financial is the biggest offender. Synchrony is the largest issuer of branded credit cards, such as PayPal’s Card or Walmart’s credit card. Although it says “Walmart” on the front, the banking services are actually provided by Synchrony Financial.
This insurance costs $1.66 per $100 per month. That might sound small, but it’s actually huge, and can more than double your credit card interest. For example, at $10,000 balance, you’re paying $166 per month, or $1,992 per year. That’s an extra 20% interest on top of your existing credit card interest.
The vast majority of users signed up to this service never use it, and many aren’t even aware they’ve signed up for it. Most have definitely not done the math on how much this is costing them.
Here’s what the signup box looks like:
“Adjustable” APRs that Only Go Up
Most people’s credit cards are on an adjustable APR. That means that, if interest rates go up, your interest rate can increase as well.
Usually a credit card’s interest rate is determined by a national interest rate, such as the Federal Reserve’s interest rate, plus a profit margin for the bank.
If you see on TV that the Fed is raising or lowering interest rates, that can influence your credit card’s APR.
Here’s the thing: your credit card company will often use this as justification to increase your APR, but you’ve likely never heard of a credit card company voluntarily lowering your APR.
Credit card companies will usually only use increases in Fed interest rates to increase your APR, not decrease it. However, if the Fed lowers interest rates, as they’ve done in 2020, it may be worth calling your bank to see if you qualify for an APR decrease. They won’t do it proactively, but if you contact them, they may be willing to lower your rate.
Store Financing with Full Payback Requirements
Buying a new mattress, computer, or other large purchase? You’ve probably seen those 0% financing deals.
These look like good deals – and they are a good deal – as long as you make sure to pay off 100% of the balance by the end of your promotional period.
Store financing will charge you interest on the entire amount at the end of a 0% APR period, if you don’t pay the balance to $0. This is very different to how credit card interest works.
Let’s say you make a large purchase, for $5,000. You get 24 months of 0% APR. What happens if you’ve paid off $4,900 by the 24 months?
Here’s the surprising answer: because you didn’t pay your balance to $0, you’ll get charged interest on the entire $5,000, as if you never had the 0% APR to begin with. In other words, even though you only owe $100 left, you’ll get charged $2,400 in interest for the 2 years that you carried a $5,000 balance.
So put a reminder in your calendar: make sure you’ve paid off your entire purchase before your promotional period is over!
Save Money by Creating a Plan
Want to save even more money on your credit cards?
We built an app, Empathize.com, which shows you how to save money & get out of debt faster. You can try it for free here.