Credit Cards 101: The story of a chargeoff

[Bigwoodystyl]

I wrote this a long time ago in a PM response to a poster who clearly didn't understand credit cards...

It's nothing eye-opening, but it's useful information if you don't understand how credit card fees are applied.

Credit Cards 101: Overlimit Fees, Late Fees and Finance Charges

"The story of a charge off"

Let's assume that:

-you first opened your credit card account on August 16.

-The limit was $300.00

-The APR was 16.5% variable.

-The late fee is $35.00. The OL (over limit) Fee is $35.00. The returned payment fee is $35.00

-Finance Charges are assessed using a 2 cycle-ADB (Average Daily Balance)

-The "Performance Based Pricing" or "Penalty" or "Default" APR (the rate charged if you miss payments is: 33.33%)

Let's assume your first statement closed on October 1 with a balance of $278.00 and a minimum payment of $10.00 due on October 23. You made a $10.00 payment on October 24. (1 day late!)

Your next statement closes on November 1 and the balance is now approximately $343.00!! A minimum payment of $48.58 is due November 28 (you get a longer time period to pay your bill now that it is determined you don't pay in full. This is the difference between a "transactor" and a "revolver" in industry terms). The $48.58 payment is determined by taking 2.5% of your outstanding balance plus the late fee and plus the outstanding finance charges.....

To find out how in the heck they got a balance of $343.00, take your $278.00 balance and subtract your $10.00 payment. Then, add approximately $5.00 Finance Charges. (.165/365*46*ADB). Then, add $35.00 late charge because you paid the minimum late. Because that late charge brought you over the limit, add a $35.00 OL Fee.

It is now November 2, and you have entered the next statement cycle. Your balance is still $343.00. You haven't had any activity since your last payment. However, because you are now into your next statement cycle, the statement which will close on December 1, and, because you are over the limit into this statement cycle, you need to be aware that an OL fee is coming on December 1 regardless of what you do!!! Even if you PIF on November 3, you will still get an OL fee on December 1!!!

Let's now assume you didn't know about the above OL fee. You are determined not to let this happen again. You will pay off this card within 2-3 months and "never use it again" you're so angry at this point, so you make your payment of $60.00, slightly more than the minimum due, and you make it on November 15, two weeks before the due date of November 28.

The next statement closes December 1 and your balance is $326.00!!! A minimum payment of 16.30 is due on December 28

343.00 (beginning balance) -60.00 (payment) + 35.00 (OL fee) + 8.00 (finance charges)=326.00

Keep in mind, it's now December 2 and your balance is $326.00, so you are again over the limit and will receive an OL fee on the statement that closes on January 1, regardless of what you do. At this point you become so upset you go right to the company's web site and you PIF on December 3. You'll be damned if you pay another nickel in fees or in finance charges to these "crooks" The credit card issuer gives you provisional credit for your payment the day that you make it. The balance on the card as far as you know from their credit card online services web site is showing $0.00.

Then you’re out on the weekend and you see something you just have to have. You are still carrying this credit card in your wallet that has a $0.00 balance, despite your intentions of never using it again. You have paid over $100.00 in fees and have learned the lesson to always PIF!! So, you feel safe using the card again, knowing that you will PIF by the due date this time….. You therefore spend $250.00 on the card. The balance on the card is now $250.00 as far as you know.

You don’t check your statements online and the next statement which closes on January 1 comes and the balance is $712.00!!! WTF!! What happened?!

Well, in your haste to PIF on December 3, you accidentally keyed in the wrong routing number into the card issuers web site, and while the card issuer gave you provisional credit for the payment, that credit was withdrawn, backdated, effective to the date it was made, once the payment was returned, “unable to locate account”. Since you did not make another payment by the December 28 due date, a late fee was applied. Since you were over the limit, an OL fee was applied, since the payment was returned, a returned payment fee was applied. That’s $110.00 in fees for something you thought you had PIF!! Now, because you have paid late twice in the last 3 months, your APR skyrockets to 33.33%. So, your finance charges this time are more substantial at approx. $30.00

So,

$326.00 (beginning balance) - $326.00 (payment) + $326.00 (returned payment) + $35.00 (returned payment fee) + $250.00 (your new purchase) $35.00 (late fee) + $35.00 (ol fee) + $31.00 (FC)= $712.00

Now, you’re upset. Your $300.00 tradeline has a balance of $712.00. The minimum payment is now $152.80 due on January 28.

And, again because it is now January 2 and you are over the limit, an OL fee will be applied on February 1 no matter what you do. Worse, still, interest is now accruing on a more significant balance of $700.00 at a rate of 33.3%!!!

You decide not to make the payments, (you’re already delinquent from December 28, b/c your payment was returned and never paid.) When you miss the payment due January 28, the December 28 payment becomes 30+ days late and gets reported, when you miss the February 28 payment, you get a 30,60. When you miss the March 28 payment, you get a 30,60,90. When you miss the April 28 payment, you get a 30,60,90,120.

The balance on the Feb 1 statement is: 817.00

The balance on the March 1 statement is: 920.00

The balance on the April 1 statement is: 1038.00

The balance on the May 1 statement is: 1160.00

So, this balance of $1,160.00 consists of only $528.00 of purchases actually made by you. The rest is bank fees.

Now it gets charged off, add another 30% for attorney’s fees. It goes to court and they state in a complaint that you owe $1508.00, or 500% of your original $300.00 tradeline!!!

The lesson of course is always PIF before the due date. Always verify the payment has posted both to your credit account and to your deposit account. Always verify and always pay. If you cannot pay, call the card issuer to tell them you cannot pay before the fees add up.

[new mom]

WOW, that's how they trick you!!!!!!!!!!!!

[swirlgirl]

WOW, that's how they trick you!!!!!!!!!!!!

No tricks. Just math. Consumers have to read the fine print.

[cjtx]

If you don't think they trick people with the fine print cryptic language, how come they don't provide an example, like the one above, of how they will apply the "simple language" of the agreement.

Don't blame math.... Reading and understanding the fine print are 2 separate issues.

[Bigwoodystyl]

Well, posting an example like the one above within the credit agreement would assume the cardholder doesn't pay his/her bill for 6 consecutive months...

I posted this as an example of how fees are applied to an account, and not as a way "predatory credit card companies trick vapid consumers into chargeoff."

Then again, take it as you will.

It's only a hypothetical example (that is probably nostalgic for some of the posters here...)

[LeslieR]

WOW, that's how they trick you!!!!!!!!!!!!

Say what? How could you say this scenario is a "trick"?? The sequence of events BW lays out in his hypothetical example, and why they happened, should really be understood by any adult. The card user did nothing right - didn't pay on time, didn't come close to paying in full, wasn't even careful enough to enter his/her payment info. correctly, and didn't even bother to look at the account summary on a monthly basis let alone often enough to know if payments were posting. The lender did nothing but enforce the card agreement that the card user had access to for the whole life of the account. There are consequences - interest, late fees, overlimit fees, and returned check fees -- for all of that bad behavior.

I am the first one to admit I've never read a credit card agreement in its entirety. But it all boils down to this: Pay your bill at least in part on time or we will come after you to get what we are owed and then some for the trouble of extending you credit and not being repaid. Pay your bill in full or we will charge you interest. The end. It's all you need to know. If you live by those rules, the rest is pretty irrelevant to you. It doesn't take any special education to understand how credit cards work. I understood at least that much when I got my first credit card in high school. But things don't always work out according to plan, do they? (They didn't for me! -- I'm the first to admit!) But it's not the bank's fault.

Seriously, I am no defender of banks....I had my share of seriously f'd up credit problems and inordinate fees. But I take responsibility for them. Nobody tricked me.