Getting squeezed by credit card companies
Card issuers use all sorts of tactics to wrestle every penny out of customers. Here's what you need to know.
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NEW YORK (CNNMoney.com) -- When 53-year-old Don Cressman was struggling financially, he charged a bit more than usual on his card, but carefully watched his balance to make sure he didn't go over his limit. When he opened his credit card statement, he was shocked to find a $29 over-the-limit fee added to his bill.
"I was charged an over-limit fee when the interest charge kicked my account over my limit," said Cressman. When he called his credit card issuer to complain, they refunded the charge. "I was told that in the future I would 'just have to watch my balance,'" he recalled.
Over-the-limit fees aren't the only tactic in the credit card companies' bag of tricks. There are a slew of penalties, fees and other billing practices that can cause consumers to find themselves drowning in debt.
Americans hold $850 billion in credit card debt, and the average balance per card-holding household is $8,568, according to the Consumer Federation of America.
But even borrowers who pay their bills on time can fall victim to deceptive practices used by the card issuers and get slammed with rising interest and hidden fees, which have become the industry norm in recent years.
"The issuers have gotten a lot more trigger happy over the last few years," according to Curtis Arnold, founder of CardRatings.com, a consumer advocacy group.
Consumers aren't the only ones who are fed up. Regulators are starting to take notice too. The credit card industry has been under fire lately by various government agencies. Members of Congress have proposed new legislation and the Federal Reserve is moving ahead on new regulations that might force lenders to rein in some of their deceptive billing tactics and make their fees more transparent to customers.
Most credit card holders are well aware that missing a payment can result in a hefty late fee, which ranges from $15 to $39. But meeting a payment deadline isn't always easy. Credit card companies reserve the right to change the date of your deadline with little notice or specify an exact time of day that payment is due. Trying to stay on top of an early morning deadline or due dates that change unexpectedly often leave even the most responsible customers saddled with charges.
Those that have never exceeded their spending limit may also be unaware that going above your credit limit will result in an over-the-limit fee (up to $39) without warning. Like Don Cressman, many consumers who stopped charging when they neared their limit find that the interest rate and additional charges are what pushed their account over the line.
As if the late fees, over-the-limit fees and the interest charges themselves weren't steep enough, there are also a slew of sneaky tactics that credit card companies can use to make sure you keep paying additional charges, even when you pay off your bill.
For example, many banks calculate finance charges using what's called double-cycle billing, a confusing practice that averages out the balance from your previous two bills. So if you carry a balance and pay a finance charge one month, you'll get hit with a finance charge on your next bill as well, even if you've paid off the balance.
Then, there's a practice known as "trailing interest" - another "gotcha" to watch out for, Arnold said. If you send in a payment according to the full amount on your statement, you may find that you still owe a small balance next month. That's because you accrued interest between the time you sent the payment and when it was posted to your account.
And all it takes is one delinquent payment to cause the credit card company to up your interest rate, often substantially. But thanks to a widely-used practice called universal default, you could end up with a higher interest rate, even if you pay on time. Credit card issuers can increase your interest rate - even if you have a perfect payment history - just because you missed a payment on another card or bill.
Because of the scrutiny, some card issuers are beginning to lighten up on their fee structures and billing practices. For example, in spring of 2007 Citigroup announced it would stop using universal default and JPMorgan Chase followed suit in November. But until sweeping legislation is passed, there are a few things consumers can do to avoid getting hit the next time.
For starters, Chris Viale, president and CEO of Cambridge Credit Corp., a nonprofit credit counseling agency based in Agawam, Mass., suggests calling each credit card company to nail down your credit limit, due date and interest rate.
Card-issuing companies, such as American Express (AXP, Fortune 500), Capital One (COF, Fortune 500), Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) also disclose all of this information either online, under the terms and conditions for each card, or in the account disclosure statement you receive when you first open an account.
The important point is to "get familiar of the terms of each of your cards and get them down on paper," Viale said.
If you are having problems call customer service. "There is so much spotlight on this industry right now [credit card companies] are being a lot more careful about negative publicity," Arnold said, referring to the practices lawmakers like Sen. Christopher Dodd, D-Conn., dub unfair and deceptive. "Use the publicity as leverage."
Many card companies are willing to lower your interest rate, raise your limit or waive a fee as a one-time courtesy if you ask nicely.
"We strongly encourage our customers to engage with us directly" said a representative from CitiCards. "Particularly if they have questions about their card, payments or credit limit."
Once the terms are established, make them work for you. Though the credit card company decides the due date, you can request to change the payment deadline to a time that's more convenient - at the beginning of the month, for example, if you have more cash on hand then.
Then set up online bill pay so your payment gets posted to your account immediately.
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