"Are you nutso?"
That was a question one reader posed to me recently. He thought I was wrong to advise a young woman not to transfer $13,000 of student loan debt to a credit card offering a very low interest rate.
But I'm not nuts, just realistic. I recommended that the woman with the student loan debt not do it because those low-interest-rate cards come with too many loopholes that allow a credit card company to hike the rate if you even sneeze wrong.
"You give folks far too little 'credit' for being able to monitor their situation," the reader scolded me.
It's not that I don't think people can't handle credit well (many do), it's that folks sign up for these cards without reading or truly understanding the fine print, which states that minor missteps in the handling of their accounts can trigger increased rates -- significantly higher than the 8.25 percent fixed rate the woman in question was paying on her student loan.
You can do everything right and still have your credit card rate increased.
In fact, Minnesota Attorney General Mike Hatch is going after one giant credit card company for what he says is a deliberate attempt to mislead people into signing up for what they think are credit cards with permanently fixed rates.
In a lawsuit filed recently against two subsidiaries of Capital One Financial Corp., Hatch alleges that the company uses false, deceptive and misleading television advertisements, direct-mail solicitations and customer-service telephone scripts to market credit cards with allegedly "low" and "fixed" interest rates that, they say, unlike those of its competitors, would never be increased.
Capital One said in a statement that it has done nothing wrong.
I do believe that much of the advertising for credit cards doesn't emphasize enough that special low rates can be taken away for any number of infractions -- including making a single payment late (even by one day) or exceeding your credit limit.
However, what many consumers don't understand is that the word "fixed" in the credit card world isn't the same way it's used, for example, to describe a 30-year "fixed" mortgage loan. Now that's fixed. You can pay your mortgage late, or not at all, and still your rate will be the same. You may get kicked out of your house or ruin your credit rating, but you won't get kicked up to a higher interest rate.
Not so with credit cards. A fixed credit card rate can be changed.
Hatch's suit alleges that consumers are not adequately informed of what can happen with a low-interest-rate card and cites case histories from several Minnesota cardholders. Here are some examples outlined in the lawsuit:
• Nicole Bourgeois of Zimmerman, Minn., opened an account with Capital One in July 2003 after seeing a Capital One television ad offering low, fixed-rate cards. Based on the ad, she thought fixed meant the rate would not change for the life of the card. Bourgeois and her husband wanted to consolidate debt from other credit cards onto a single joint account with a low interest rate. Bourgeois received a card with a rate of 4.9 percent. But nearly a year after having the card, she noticed her rate had been increased to more than 14 percent. She called Capital One and was told that the increase was the result of one late payment.
• Robert Stein of Walker, Minn., said he found the prospect of a low fixed-rate card very appealing. He thought "low fixed rate" meant that the interest rate would stay at 4.9 percent for as long as he had the card. However, Stein noticed that his rate had increased to 6.9 percent. Why? When he called to inquire he was told his interest rate was increased because his payment had been received two days past the due date.
• Betty Ramsland of Duluth, Minn., obtained a Capital One credit card in 2002 with a fixed rate of 8.9 percent. Two years later, Ramsland's rate was increased to 14.95 percent. Ramsland said in the lawsuit that she asked the company why her rate was increased but never received an explanation.
Sure, some people move debt around from one low-interest credit card to the next with no problem. But you're nuts to believe a promise of a forever-fixed-rate credit card. Maybe it will stay fixed. Maybe it won't.
Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online at www.npr.org. Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or send e-mail to singletarym@washpost.com. Comments and questions are welcome, but because of the volume of mail, personal responses may not be possible. Please also note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.
