Enjoy low credit card rates, but watch the fees
By Greg McBride, CFA • Bankrate.com

Interest rates are still low, though credit card users seeing average rates of 13 percent may find it hard to believe. Credit card rates have shown little movement in the past two years, but the same cannot be said for credit card fees. Card holders should be wary of rising fees assessed for late payments, exceeding credit limits, and for transferring balances. As fees have continued to climb, it has become easier than ever to get tripped up.

Late payment fees can now be as high as $49. Many issuers also assess late fees that rise with your balance, meaning card holders with higher balances pay higher late fees. Issuers do this to protect themselves from the heightened risk that a card holder with a larger balance defaults. Card holders may have noticed that grace periods -- the period between the end of the billing cycle and when the minimum payment is due -- have gotten shorter in recent years, raising the odds of making late payments. Making payments over the phone is also becoming more costly, with one of the largest issuers recently boosting the fee from $12 to $14.95. But card holders do have one viable method to facilitate timely payments and remove the reliance on the Pony Express -- the ability to make payments online at the issuer's Web site free of charge.

Over-the-limit fees increasingly have soared to the $35 to $39 range. It isn't safe for card holders flirting with a credit limit to assume that any attempted purchases that would exceed the limit will automatically be declined. For issuers, there is more profit in assessing an over-the-limit fee than in refusing card holder purchases. A sumo wrestler would sooner back away from a buffet table than a credit card issuer pass up the chance to boost fee income.

Balance transfer fees are typically assessed as a percentage of the balance transferred, say 3 percent, with a minimum balance transfer fee, often $5. A maximum fee exists for large balance transfers, but this maximum is also increasing and can top out at $70. With debt loads growing and the maximum balance transfer fee also rising, more borrowers are likely to encounter the maximum fee.

The fee for making late payments or exceeding a credit limit is one thing, but it can also push the card holder into a much higher interest rate bracket. Further, these punitive interest rates can be triggered by late payments to any creditor, not just the credit card in question. The growing practice, referred to as a "universal default clause," permits issuers to raise the rate on your card if they notice that you are behind with any creditor, not just their card. Consider the domino effect of being delinquent on one obligation -- such as a department store credit card -- only to see your other credit cards that are currently in good standing take turns hiking your rate to near-stratospheric levels in the months following. Your creditors often monitor credit reports and can detect within a few months any delinquency, credit inquiries or new accounts that have been opened.

Minding your p's and q's by making timely payments and remaining within the bounds of your credit limit is a sure-fire way to avoid the booby traps of punitive credit card pricing, right? If only that were the case. You could be socked with a punitive interest rate if you attempt to close out a credit card that still has a remaining balance. Why? Because if you close out the card, the issuer has nothing to lose and instead opts to squeeze as much interest out of you before the balance is fully retired. Before closing out the card, read the disclosure agreement to see if such a fee may be assessed, or better still, wait until the final payoff has been posted to the account before closing it out.

Despite little movement in credit card rates over the past two years, the continued escalation in fees counteracts the low rate environment for card holders who run afoul of the issuer's boundaries.

Greg McBride is a financial analyst for Bankrate.com.

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