There's a viper in your wallet

It's only plastic, but its fangs can bite: Credit card companies are jacking up fees, whacking benefits, and cracking down on customers. Here's what to watch for—and how to avoid paying through the nose.

By Brad Burg
Senior Editor

Have you heard about the one-hour workday? It's no joke. Until recently at First USA, if a credit card payment arrived after 10 am on the due date, it was considered late.

Amazingly, that shenanigan is perfectly legal. "Establishing a cutoff time for receipt of payments is a decision made by bank operations managers, not by federal law," says Janis Smith, a spokeswoman for the Treasury Department's Comptroller of the Currency, one of the federal agencies that supervises national banks. And it's just one example of the "fee frenzy" among today's card issuers, to use the phrase of Robert B. McKinley of CardWeb.com in Frederick, MD, an analyst of the plastic-money scene.

That frenzy has erupted only during the last two years, so unless you've been blindsided by a rate increase or fee, you may not have noticed. But it's wise to be alert, because plenty of nasty practices exist out there.

Penalty rates. This may be the biggest new danger. In the past, a missed or late payment meant a one-time charge. But now, after just one or two such slipups in a year, you may get a permanent charge—a boosted, or "penalty," rate on your entire balance. The hike can be brutal, from four extra percentage points to much worse, notes Linda Sherry of Consumer Action, a San Francisco consumer advocate group. If your "teaser" introductory rate is 3.9 percent, say, a hike to a "standard" rate of 13 to 14 percent wouldn't be unusual.

Toughened deadlines. "In the good old days, some banks didn't charge late fees, even if you missed the due date," says McKinley. Today, not every lender is Scrooge-like enough to slam down the payment window one hour after opening, but plenty are cutting their post-due-date grace periods, from 15 or 20 days to 10 or five. As for First USA, while it no longer has the 10 am cutoff we mentioned earlier, its cardholder rules are still attracting attention: First USA is the target of a class-action lawsuit over its fee policies, says McKinley. So is Providian Financial, another issuer.

Over-limit fees. Today, reaching your limit may not mean your card credit is actually cut off. That may save embarrassment after you've reached for the dinner check, but it can cost you later, because the lenders' apparent courtesy just creates another way to bill you. Many charge a fee for every month your balance exceeds the limit. That fee is often $20 or $29, according to Sherry.

Higher costs for cash advances. Traditionally, credit cards have been too expensive a way to borrow cash. Now they're an even more costly method. "The rates are always bad, 20 percent or more," McKinley says. "But you pay processing fees, too, which were around $10 two years ago. These days, they're often $30 to $50."

Penalties for breaking rules elsewhere. Credit card companies now keep tabs on your relationships with other lenders, and they may raise your rate if you've hit your limit or incurred late charges elsewhere. "Of course, lenders always checked your overall credit before approving you," says the Treasury Department's Janis Smith. "But doing it on this ongoing basis—and possibility penalizing you for problems—is becoming increasingly common."

Here's our new name! And here's your new rate. Today, banks seem to take on new partners as often as Warren Beatty did in his prime, and change often signals bad news for customers. The form letter trumpeting the merger of First Humpty with National Dumpty may also tell of higher charges (perhaps in a typographical whisper). "Banks can legally change their rates on 15 days' notice," notes McKinley, "and often a reorganization brings an increase."

Transfer fees. How can a lender advertise a rate of, say, 3 percent, but actually charge more? By tacking on a fee to accept your business. That's the magic of "points" in home mortgage loans—and lenders now wave the same wand over card debt. So be careful: Though you may get the stated rate on your initial balances, later transfers may be hit by extra fees. "One angry bank customer told us that soon after opening a charge account with a 3 percent deal, he shifted $10,000 to it," Sherry says. "He didn't realize that the lender also charged him 3 percent of the balance just for transferring it."

Fees for breathing. Well, we're exaggerating—but not much. If you don't use a card for six months, some banks sock you with an "inactivity fee," according to McKinley. In fact, even trying to back out the door may cost you. Advanta used to charge an "account closing fee," and many small lenders still do.

We could go on, but it's too painful. Besides, no one can remember or anticipate every detail of every gambit. So how can you avoid card-fee shock? Here are some strategies, all of which demonstrate one theme: Take an active role.

Know when to hold 'em. The "best cards in America" listed in any given news article may not work for you, McKinley notes, since they may not suit your situation. "Yes, the rate may be 7 percent, but the credit limit may turn out to be $500." If you look carefully, though, you should be able to find cards that constitute good deals for you. Check the Internet sites recommended on page 102 for the best and latest offerings.

Know when to fold 'em. Always read the part of your bill that tells you the current rate. As you can see from our sampling of slick tricks, it may have increased, even zoomed, for many reasons. So it may be time to switch to another card.

Divide and conquer. A one-card approach seems simpler, but it may not be wiser, Sherry notes. Suppose a card offers a rate of 3 or 4 percent on funds you initially transfer to it, but charges around 16 percent on new purchases. Be careful. The lender will probably apply payments to the lower-rate charges first, so your higher-cost borrowing will stay out longer. Advice: "Put new purchases on a different card, so you can pay that balance off first," says Sherry.

Bargain. "With a card from a local bank or credit union, you might well negotiate better terms," says Smith. For example, you might request a different billing cycle, if yours is inconvenient.

Know when to walk away. Although you may be a small fish to a credit card company, it still may not wish to throw you back. "It costs about $100 to replace an account," says McKinley, "so the companies usually find it pays to heed legitimate complaints." And when all else fails, you can appeal to higher authorities.

Is there any good news on the credit card front? Yes. Besides those class-action suits mentioned earlier, lenders are feeling pressure in other ways. Last year, Smith notes, Bank One's First USA was late in crediting many accounts, which led to overbilling, which led to lost customers—and a drop in the company's stock value. So eventually, some of credit card issuers' other abuses may self-correct, too.

But even if the current fee frenzy subsides, you'd better monitor your cards carefully. In other words, heed some old advice about cards of another sort: Keep a close eye on the deal.

Yes, Virginia, there really are good deals out there ...

It may seem as though all the news about credit cards is bad. However, some cards still provide real breaks—if you know how to take advantage of them.

For example, you can indeed find cards on which you'll really pay only 4 percent or so for the new charges you make. But typically those rates last just six months or a year, and then that lovable single-digit number suddenly jumps to 12 or 13 percent. So you'd want to shift the money to another card before then.

And you'd better clean up your accounts, too. "If you simply pay off the old account but don't close it, then its credit limit will cut into your available credit," warns Linda Sherry of Consumer Action in San Francisco. "So you should write to the lender and ask to have the account closed." You should also make sure the record indicates "closed at consumer's request," so there'll be no implied cloud.

Besides low-rate cards, you might also look into the "reward" cards that provide benefits such as rebates from certain merchants, credit toward car purchases, or frequent-flier miles. What's the catch to such a deal? Often none, say experts like Robert B. McKinley of CardWeb.com in Frederick, MD. "True, such cards typically have an annual fee of $50 or so," he notes. "Still, assuming you pay your card bill in full each month, a frequent-flier plan, for instance, can truly be a valuable bonus. Of course, you have to run a lot of charges through the account to see a real payoff—maybe $25,000 to get a ticket good anywhere in the US. But for charges you'd incur anyway, this can make sense. In fact, because I charge most of my office expenses on my card, my wife and I have traveled to Europe for free. Many doctors could follow the same plan."

For information on such deals, and on cards generally, the Internet has excellent resources. Among them are McKinley's site (www.cardweb.com), Sherry's site (www.consumer-action.org), and www.bankrate.com.

Who are the card police?

If you have trouble with a card lender, you may get the problem resolved fast by blowing the whistle. But which whistle?

To figure that out, you must know which kind of lender issued your card. The back of the statement may provide the answer. Or you can check the Federal Reserve's Web site, www.ffiec.gov/nic/default.htm, to find out which regulators govern which banking organizations.

Most cards are issued by nationally chartered banks, which usually have "national bank" or "NA" in their names. For help, contact:

Comptroller of the Currency
Customer Assistance Group
1301 McKinney St., Suite 3710
Houston, TX 77010
800-613-6743
www.occ.treas.gov

For state banks, contact your state's bank commissioner. You can probably find the proper office quickly through your state government's Web site. And since the banks are federally insured, you might also get help from:

Federal Deposit Insurance Corporation
Division of Compliance and Consumer Affairs
550 17th St. NW
Washington, DC 20429
800-934-3342
www.fdic.gov

Many credit unions issue their own cards. For those, contact:

National Credit Union Administration
1775 Duke St.
Alexandria, VA 22314
703-518-6330
www.ncua.gov

Thrifts (savings and loans) are in a separate category, too. "S&L" in the name is a pretty clear indication that the bank is a thrift. So is "Federal Savings Bank" or "FSB." Contact:

Office of Thrift Supervision
Consumer Program Division
1700 G St. NW
Washington, DC 20551
800-842-6929
www.ots.treas.gov

. There's a viper in your wallet.

Medical Economics

2000;5:101.