Don't fall for these stupid credit-card tricks

Lenders are counting on you to fatten up their profits -- with higher rates, new fees and more fees -- all hidden in the fine print. Here's how to fight back.

By Liz Pulliam Weston

The competition among credit-card companies has rarely been fiercer. So why are your credit cards costing you more than ever?

A nearly saturated credit-card market means lenders are looking for new ways to boost their profits, and that often means bigger fees and higher interest rates for all but the most careful consumers. A rash of consumer bankruptcies has lenders wary as well, and they’re more likely to penalize customers they think are higher risk.

What follows is a sample of the stupid credit-card tricks lenders are using to ding you, and what you can do to fight back.

Fees, fees and more fees

Fees have become a big part of lender profits these days. The amount lenders collect in late fees has risen more than fourfold since 1996: from $1.7 billion then to $7.3 billion last year. About a third of credit card-issuer profits, according to Consumer Action, now come from late fees, over-limit charges and other penalties.

It’s not that we’ve suddenly become more remiss about our payments. When we lapse, however, the penalties are much greater. Consider:

• The average late fee is now $29.88, according to credit-card tracker CardWeb, nearly three times the $11.96 average charge in May 1994.
• Over-limit fees, which are added to your bill when you exceed your credit limit, more than doubled in the same period from $12.56 to $27.40.
• Cash advance fees used to average about 2% with a $2 minimum and $10 maximum; today, those charges average 3% with a $10 minimum and no maximum.

At the same time, it’s easier to make a late payment, because lenders are reducing grace periods -- the time you have to pay your bill before finance charges and late fees apply. The average grace period is just over 21 days now, compared with nearly 30 days in 1990. Issuers that used to offer a little leeway -- not charging late fees if the payment was received within a week or so of the due date -- now charge if your check arrives a day late.

That means more of us are getting slapped with charges. Two out of three people, in fact, paid a late fee last year.

How you can fight back:

• Send in at least the minimum payment as soon as your bill arrives. You can always send in more later.
• If you consistently carry a balance, set up an automatic transfer, either with your online bill payment system or directly with the credit-card company, so that the minimum payment is deducted from your checking account every month.
• If you’re charged a late fee, call the card issuer and protest. Many are willing to remove the fee if you’re a good customer and not habitually tardy.
• Don’t use a credit card to get cash. It was always a bad deal and now is even worse.

The bigger the balance, the larger the cost

People with large credit-card balances have always paid more interest. Now they’re facing higher fees as well. Citibank and Discover recently raised their late fees to $35 for customers with balances of more than $1,000; Chase Manhattan now charges the same fee if your balance is over $1,200.

The lenders have set up a tiered system so that people with balances under $100 pay a smaller amount. Chase levies a $12 fine on these small accounts, while Citibank and Discover charge $15. (Of course, these fines are proportionately a bigger deal: A $35 fee is 2.3% of a $1,500 account, while a $15 fine is more than 15% of a smaller balance.)
Since the average amount owed on a credit card in April was $1,402, according to credit trackers Auriemma Consulting, that means a lot of folks will be paying the higher fees.

Lenders may penalize you for big balances in another way: by raising your interest rate. With so many people declaring bankruptcy -- a record 1.5 million last year -- issuers are searching for any early warning sign that a customer might bail on his or her debts. The lenders say the higher rates reflect the greater risk these maxed-out customers pose.

How you can fight back:

• Pay down your balances. The more debt you carry, the more interest and fees you’ll end up paying, and the worse your credit rating.
• Call your lender and ask for a lower rate. If you’re a good customer and perceived as generally a good credit risk -- and if you’ve paid down some of your balance -- your lender might be willing to rescind any increase.

Your credit-card company is watching you

Most people know by now that credit-card companies will jack up their rates if consumers miss a payment or two.

But more people are now discovering they can lose a great rate if they miss a payment on any account -- or if they open too many new accounts or charge too much on any of the cards they have. Lenders routinely scan credit reports, said CardWeb President Robert McKinley, looking for evidence that their customers are piling up too much debt or having trouble paying their bills.

“Creditors are looking for late payments, collection accounts, too much available credit or a high credit utilization -- maxing out cards -- as a basis to raise interest rates,” McKinley said.

Even customers that credit-card companies used to love -- those not-so-savvy folks who pay only the minimum each month -- are now regarded with suspicion.

Paying only the minimum means paying lots of interest, since it can take years, if not decades, to retire your debt this way. In the past, some lenders were so eager to encourage this behavior that they lowered their minimums from 2.5% or 3% of the balance to as little as 1%.

Now, though, some lenders have decided that people who consistently pay only the minimum are actually risky customers who are more likely to default, McKinley said.

Providian, for example, is boosting interest rates to a whopping 29.99% for customers with “minimum payment activity,” McKinley said. People with poor credit scores or who opened their accounts at Providian within the last six months also face the higher rate.

How you can fight back:

• Be vigilant about your credit. Pay all your bills on time, apply for credit sparingly, and don’t max out your credit cards.
• Always pay more than the minimum. Paying an extra $25 a month on a $5,000 balance can shave nearly 16 years off the time it takes to pay back the debt, according to debt expert Gerri Detweiler. You’ll also save more than $3,000 in interest costs.
• Check your credit report at least once a year and challenge any erroneous information. Credit bureaus are required by law to investigate any item you dispute and to remove it from your record if it’s not accurate.

Balance-transfer roulette

You may not see as many 0% balance transfer offers as in years past, but card issuers are still trying to get customers to move their debt from one card to another with low-rate offers. Unfortunately, many of these seemingly-tempting offers are studded with traps for the unwary. Among them:

• Balance transfer fees. Many lenders now charge 3% when you transfer a balance to their card -- a fee that offsets, and could wipe out, any interest rate advantage.
• Higher rates for purchases. Most cards that offer low rates on balance transfers make up for it with high rates on new purchases. Also, any payments you make will be deducted from the low-rate portion of your balance first, which means your higher-rate debt will continue to accumulate interest longer.
• Bait and switch. Some lenders may offer a great rate for a balance transfer to a new card, but that doesn’t mean you’ll get it -- even if the card issuer tells you you’re “pre-qualified” for the new account. Once you apply, the lender might approve you, but only for a higher-rate card.

To make matters worse, bouncing a balance from card to card can hurt your credit score, if you open lots of new accounts to take advantage of balance transfer offers.

How to fight back:

• Read the fine print. Try to avoid balance transfer offers that only apply for a few months and lenders who might give you a higher-rate card than the one they’re advertising.
• If the card charges a fee to transfer your balance, make sure the interest savings will be more than the additional charge. The calculator at Bankrate.com (see link at left) can help you with the math.
• Use one card for balance transfers and another one for new purchases.
• Try to consolidate your balances to one or two cards. You’re bound to lose track of due dates, rate changes and other details if you try to juggle too many cards.
• As always, try to pay off your balance as soon as possible. The only way to win the credit-card interest game is not to play.

Rethink which card you take overseas

For years, savvy travelers knew that credit cards were the best way to pay abroad. Not only was a card safer than carrying cash and more convenient than traveler’s checks, but you got a great exchange rate in the bargain.

That’s because credit-card companies generally qualified for institutional exchange rates, rather than the much less advantageous rates tourists find at exchange kiosks.

Unfortunately, card companies have managed to blunt this advantage by raising the typical fee for overseas transactions from 1% to 3%. You might not have even realized this happened; typically, the fee doesn’t even show up on your statement, since it’s embedded in the exchange rate you’re shown. But it should be revealed somewhere in the fine print of your cardholder agreement, or you can call your issuer and ask.

The difference -- $90 on $3,000 worth of transactions, compared with $30 when the fee was 1% -- may not be enough for you to return to travelers’ checks. But you might want to find out if one of your cards offers a better rate than the others and use that one.

How to fight back:

• If you’re planning an overseas trip, put most of your purchases on the card that offers the lowest fee for foreign transactions.
• Take another card, just in case. For example, not all merchants accept American Express, so you might want to bring a Visa card as well.