Complex pricing of credit cards

Source: Adam Levitin, Chicago Tribune

Pop quiz: what's the interest rate on the credit cards you're carrying? How about the default rate? Do you know what constitutes an event of default? What will trigger a penalty fee or surcharge? How much are those fees? If you're like most Americans, you probably cannot answer many or all of these questions. Consider this: It's entirely possible that under a common cardholder agreement provision called a universal cross-default clause that your dispute with the cable company over lousy service constitutes an event of default on your credit card. The default bumps your interest rate up to 32 percent, which is applied retroactively to your existing balance and (under another common practice called "two-cycle billing") to the balance you paid off last month. Credit cards have a complicated price structure. Cards have multiple price points -- annual fees, merchant fees, interest (at several different rates), and assorted back-end fees, such as late fees, over-limit fees and currency conversion fees. This pricing structure makes it virtually impossible to determine the potential costs of carrying a balance.

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