(MONEY Magazine) – When even a Bush-appointed member of the Federal Reserve Board starts running into trouble with the credit-card companies' new tough-love policies, what makes you think you won't be next? Fact is, you may be. In a new push to boost profits, the nation's leading card issuers are squeezing their customers, all of them, including the most creditworthy.

Just ask the Fed's Lawrence Lindsey of Clifton, Va. Despite his $123,100 salary, he was recently rejected for a Toys R Us rebate card. The problem: He had applied to a few lenders while refinancing his home. The store's computer-driven credit-evaluation system falsely read his loan inquiries as a warning that the 42-year-old father of two might be reckless with money. Quite the opposite. He was shopping for the best deal.

Then last month, Lindsey got slapped again. He's one of 150,000 GE Rewards MasterCard holders who will be hit with an annual $25 penalty fee starting Dec. 27 because they are too conscientious--they pay in full each month to avoid finance charges. That's smart. But credit-card companies, which collect 75% of their revenues through these charges, regard these so-called convenience users as lousy customers who cost them money--up to $140 a year in cash rebates in GE's case. That's one reason card issuers have begun eliminating the 30-day interest-free grace period following a purchase.

GE has gone a step further. It is one of the first lenders to penalize its prompt payers, and industry analysts predict many more will follow even if GE loses 7% of its 1.5 million Rewards MasterCard holders over the next nine months, as experts estimate.

Lindsey will be one of them. "I will send my card back," he told Money's Washington correspondent Ann Reilly Dowd. "That is what consumers should do if they don't like this calculated marketing move by GE."

The credit-card firms' moneymaking ambushes are hardly confined to unprofitable customers like Lindsey. They are working up surprises for everyone:

--If you exceed your credit limit by as little as $1, even if the company approves the purchase by phone at the store, you may be charged an over-limit fee.

--If you miss your monthly payment date by just one day, you may get a late fee. According to Bankcard Holders of America, a consumer group, 10 of the top 30 card issuers impose fees if you are one to three days behind. And the fees themselves are up to $20; as recently as 1991, the top fee of $10 or so wasn't imposed until you were around two weeks past due.

--If you don't pay on time just twice in one year, your finance charge may soar to 24.9%--or as high as 32.6% at Associates National Bank, a Ford Motor Co. subsidiary.

--Perhaps worse, if you unwittingly fail to meet a "credit standard" that the company did not spell out to you, your finance charge could still streak to a penalty peak. For example, many companies are routinely checking your credit report twice a year. If they see your debt increasing, they may instantly raise your finance charge from, say, a normal 16% to a punitive 25%, even if you have never missed a payment. And then you may need to be a model borrower for 18 months before the company decides to stop treating you like a high risk.

--Also, if you apply for a new card these days, chances are the company will not set your precise interest rate, no matter what numbers it is advertising, until it checks your credit rating. So you could be tempted by an ad offering an introductory 5.9% rate on up to $100,000 but end up with a card carrying more than double that rate on less than $5,000 credit.

--And here's the topper. If you prudently apply to several cards to find the best deal, you will almost certainly trigger the kind of computer-driven examination that got Lindsey rejected, or at best get offered punishing rates reserved for the most undisciplined borrowers. When it comes to credit cards, smart consumer shopping will get you dumb computer penalties.

Before we deal with how you can avoid getting credit crunched, it may be instructive to consider what's behind this new push for profits. Industry executives insist they are simply asking their worst customers to pay their fair share. "People can be making payments, then out of the blue they file Chapter 11," says Robert McKinley, president of RAM Research Group, a credit-card tracking service. Under this so-called risk-based pricing, a borrower who looks shaky pays more than someone with a clean record.

However, consumer advocates say that oftentimes the companies seem to be running almost a bait-and-switch scam, where you sign up under one set of terms and then get hit with penalties based on fuzzy, if not flawed, risk criteria.

Bottom line: Both the consumers and the companies are hooked on credit. You know how much you depend on your plastic. And the same is true of the companies supplying it. They have become addicted to the almost obscene profits they made putting $1.5 trillion of credit into consumers' hands in the past four years alone.

As recently as two years ago, the return on equity for credit-card lending was an astonishing 50%, more than three times higher than banking as a whole. So there's little wonder why traditional lenders were joined by retailers, airlines and even grocery stores in a mad rush to pave the country in plastic. In September, senior bank analyst George Salem of New York City's Gerard Klauer Mattison & Co. described to the House banking committee how irrational the industry had become. He testified that in 1994 and again in 1995, on average, "every United States resident between ages 18 and 65, about 150 million persons, received 17 card solicitations a year."

No one with a mailbox could escape the onslaught, and few could resist the instant gratification of buying now and paying much later, including the companies' new targets: college students with more impulses than patience, and families making $35,000 or less with more needs than means. (For more on college credit, see page 45.)

The binge brought some inevitable consequences. The amount of credit-card accounts that were 30 or more days overdue rose to 3.7% in the second quarter--an all-time 22-year high. Even more worrisome, personal bankruptcies are up 23%. Analyst Salem notes: "It is no wonder that so many defaulters and bankrupts had the following profile: 20 or more cards, an average of $40,000 in card debt, and annual income averaging only about $35,000."

It was only a matter of time before this wave of woe began eroding industry profits. Bankruptcies now account for nearly half the losses banks are taking on credit-card accounts. In addition, the lenders' return on equity has dropped by half to around 25%, and their return on assets has sunk from 3% to 1.75%.

The result: today's push for profits--at your expense. The industry got in trouble by not paying enough attention to how many cards the borrower possessed, how much credit including mortgages and home-equity loans he or she had piled up, and how much of that money he or she had drawn down. So prepare yourself for intense scrutiny on each count--and higher charges if you appear to fall short on any one.

Banking experts say that in the past 12 months nearly all of the top 15 card issuers have increased their prices in one or more ways. That trend is sure to continue too, for all the reasons mentioned plus this one: Several of the companies that have come down hard on their customers--Capital One, First USA, Advanta and Associates National Bank--are posting better earnings than competitors who have yet to act.

Consumer advocates see an irony in this punitive trend--and a threat to the economy. Luther R. Gatling, president of New York City's nonprofit Budget and Credit Counseling Services, says: "What the banks are not acknowledging is that people are using credit to pay for credit. When all their lines are to the limit, extra charges and penalty rates push them over the edge."

The worst fear is mass defaults, followed by a severe credit squeeze that strangles consumer spending and then the entire economy. Laura D'Andrea Tyson, who heads President Clinton's National Economic Council, is monitoring the rising credit delinquencies. "It's a danger signal," she said in a phone interview. "But the consequences may be a tightening of credit or change in prices rather than any negative effect on the overall economy." She added that she was asking a staffer to look into whether the higher card charges are fueling the surge in bankruptcies: "It's worth taking a look at." The Office of the Comptroller of the Currency is also concerned. In September it warned bank-card issuers to check closely the creditworthiness of the customers they solicit.

For now, at least, the more immediate question is what you can do to protect yourself in this increasingly predatory environment. The sad fact is, it may be nearly impossible to avoid getting inconvenienced--if not impaled--by computer-driven credit checkups, penalty fees or major charges for minor transgressions. But you can minimize your pain this way:

--Pay off your entire balance on time each month. Only 36% of cardholders do that now, up from 29% five years ago. But obviously, avoiding finance charges is smarter than ever.

--If you can't erase your balance, send in as much as you can. The less you pay, the more the companies make. Some firms encourage you to send less. For instance, in return for a one-time payment of $19.95, Capital One tested cutting its monthly minimum from 3% to 2% of your balance. What Capital One didn't say was that, at 2%, it would take you 30 years to retire a $2,000 balance--and you'd end up forking over more than $8,000.

--Maintain as few cards as possible. Although the typical cardholder carries eight to 10 with an average monthly balance of $3,900, you probably only need two: one major card and one for emergencies--if, say, someone steals your main card.

--Limit your debt. Experts say you should restrict your unsecured debt total to no more than 20% of your gross annual income. Anything higher is a warning light for lenders--and a handy excuse to whack you.

--Read what the card issuers send you. Under law, the firms offering a fixed-rate card have to give you only 15 days' notice before changing terms. And companies providing variable-rate deals can skip the warning if its loan agreement says it may alter terms. But often even those warnings and agreements come in fine print legalese. Pore over the stuff. Twenty states, including California and New York, allow any customer facing a pricing change to close the account and repay the balance under the old terms, if the bank is based in one of the states.

--Shop for cards carefully. Ask issuers to send you their credit agreements before you apply. That way, you can zero in on the best terms for you, without triggering multiple credit searches that make you look like an undisciplined borrower.

--Finally, complain if you get hit with an unjustified penalty. It costs credit-card companies up to $150 to attract a good customer, so you may have more leverage than you think.

There is one more thing you can do as well: Protest to Washington. Trite as it may sound, you could have an impact writing to U.S. Representatives Joseph Kennedy (D-Mass.) and Charles Schumer (D-N.Y.). Both have spoken out recently against unfair credit practices. (You can also complete our survey at right, and we will send it to Washington for you.)

"Banks are violating the spirit if not the letter of the Full Credit Card Cost Disclosure Act," says Schumer, the law's chief sponsor. "They don't believe in disclosure. They don't believe in competition. So we're exploring ways to fix this problem."

Kennedy is also preparing legislation to outlaw abusive tactics. Among other things, his bill would:

--Prohibit the "GE fee," so that companies could no longer penalize you for paying your bill on time, or raise finance charges just because your debt increases.

--Prohibit penalties for exceeding your credit limit any time the card company approves the purchase in advance.

--Prohibit two-cycle billing that now allows companies to eliminate grace periods and recalculate the interest you owe to the date of purchase of every item on your bill when you carry a balance from one month to the next.

--And last, require companies to explain precisely what changes in your behavior or your credit history would prompt them to increase (or decrease) fees--and then give you at least 15 days' notice before imposing the changes.

Don't expect legislation like this to cruise through Congress, especially if the November elections don't curb the anticonsumer bias shared by many lawmakers these days. Still, the very fact that serious policymakers like Lindsey, Tyson and House Banking Committee chairman James Leach (R-Iowa) are beginning to speak out about the economic threat of credit-card delinquencies means that national attention is focusing on this industry. At the very least, the threat of retaliatory laws or regulations, backed by a spirited consumer protest, may persuade card-company executives to think twice before they try to fatten their profits by flattening your wallet unfairly.