Tough Times Series: Credit Cards: Switch and Save

by Judy Dahl

If you're like most Americans, you probably use more than one credit card. Do you know what would happen if you went over the credit limit on one of your cards, or if you made a late payment? If you got the card from a large national card issuer, chances are you'd be charged high penalty fees, and you might find your interest rate hiked to more than 30%.

According to a 2006 report by the U.S. Government Accountability Office (GAO), consumers with credit cards from large national issuers account for 80% of the nation's more than $1.8 trillion in credit card debt. "These large credit card banks, in just the last decade, have used a variety of tricks and traps to increase their interest rate and fee income," says Travis Plunkett, legislative director for the Consumer Federation of America, Washington, D.C. "The tactics are unfair to consumers and in some cases abusive."

The GAO report says these issuers charge many new types of credit card fees in amounts that have risen much faster than inflation. The report also finds that large issuers' credit card disclosures are confusing, bury important information, and often don't tell cardholders when late fees or penalty interest rates could be charged.

Look at your credit union first

Did your credit card come with tricks and traps? If so, shop carefully and switch to a better card--they're not all created equal. "Don't just respond to a solicitation you receive in the mail; it may not disclose all the interest rates and fees associated with the card. Comparison shop and find a card that provides the best terms," advises Plunkett.

Look at terms and conditions; in most cases you'll find credit union credit cards are cheaper and the most consumer-friendly.

"We generally recommend consumers look at credit unions first," he adds. "Look at their terms and conditions; in most cases you'll find they're cheaper and the most consumer-friendly."

Nationally, the average credit card late-payment fee has more than tripled in the past decade, to $33.64, and fees as high as $39 are common among large bank issuers. Yet the average credit union late-payment fee is $15 to $20 lower. The average national overlimit fee is $31, while the credit union average is more than $13 less. The average credit union interest rate is significantly lower too, by 274 basis points (2.74%: 100 basis points =1%), than the average bank rate on credit cards.

What to ask

If you're not sure about your credit card fees and penalties, ask your card issuer. The terms may have changed since you opened the account, and you may not have seen the notification, which generally accompanies your account statement. You should know:

Consumers holding credit cards from large national issuers account for 80% of the nation's more than $1.8 trillion in credit card debt.

Your interest rate
Whether there are different rates--and if so, what--for balance transfers, cash advances, and purchases
The order in which payments apply to different types of transactions; some banks pay off low interest-rate balances first so the high-rate ones stay on your account longer
Whether the rate could increase to a higher penalty rate, and under what circumstances (such as a late payment--on this card or any other card)
Annual fee, late fee, and overlimit fee amounts, and when they're charged.
What other fees are charged, and when
The grace period, or number of days from the billing date you may pay in full without incurring finance charges

If you're not satisfied with the answers, maybe it's time to shop for a better card. And be sure to ask these questions up front.

Common tricks and traps

A 2006 report by the U.S. Government Accountability Office (GAO) found that large national credit card issuers use deceptive practices to pump up profits. Some of the most common:

Universal default--If you make a late payment to any creditor, even if you pay your credit card bill on time, the credit card lender imposes a higher "penalty" interest rate on the credit card. Penalty rates often are more than double the original interest rate. Some lenders invoke universal default under other circumstances as well, such as a decreased credit score or exceeding the credit limit on another loan. One large card issuer stopped this practice due to consumer and legislator backlash, and others may follow, anticipating legislation to curtail the practice.
If you're not sure about the fees and penalties for your credit card, ask your card issuer.
Double cycle billing--Lenders charge interest on credit card debt a consumer already has repaid. For example, a cardholder charges $1,000 on a credit card and makes a timely payment of $990, expecting to pay interest on the remaining $10. But the lender charges interest on the full $1,000, even though the cardholder already had paid 99% of the balance on time.
Junk fees--Issuers charge "creative" fees in amounts way out of proportion to their costs for processing the account. Examples: Charges up to $15 for paying on time by phone or online; 3% balance transfer and cash advance fees (or $300 on a $10,000 transfer). Some lenders approve transactions over the credit limit, but then charge an overlimit fee--for each transaction while the balance is over the limit.

The report details many other questionable practices; you can read it on the GAO's Web site.

The average credit card late-payment fee has more than tripled in the past decade.

[Sources of rate and fee data: 2006 GAO Report, CUNA economics and statistics and Datatrac/Informa.]

Real world examples

In her testimony before a March 7, 2007, Congressional hearing, Alys Cohen, staff attorney for the National Consumer Law Center, shared real-world examples of large national credit card issuers' abusive practices:

An active-duty sailor opened a bank credit card account with a $250 credit limit and a 9.9% interest rate. Within a week, her bank assessed a $95 program fee, a $29 account set-up fee, a $6 participation fee, and a $48 annual fee. Her first monthly statement showed a balance of $178--and she hadn't made a single purchase.
An elderly woman living on Social Security disability checks borrowed $2,000 on a card from a national issuer. She paid $3,492 in interest on the amount, and a court rejected the issuer's attempt to collect an additional $5,000 in late fees, penalty interest, and credit-protection costs, deeming the charges unconscionable.

Consumer groups and several legislators are working to make such practices illegal, but it won't happen overnight. In the meantime, shop around before you open a credit card account. Ask questions to be sure you understand all the costs involved, then pick the best deal. It's likely to be at your credit union.

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Published July 16, 2007

Printed Friday, July 25, 2008

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