Credit card penalties get more severe
of the nation's top credit card companies, looking to jack up already bulging
profits, have boosted their late payment penalty fees to $35.
Citibank, MBNA America, and Discover
will pile the increased fee on any customers with a balance of $1,000 or more
who miss a payment deadline. The late fee penalty for balances less than $100
is $15, with a $25 fee for balances between $100 and $1,000.
Fleet Bank charges $35 for any late fee, regardless
With the average American household carrying
more than $8,000 in credit card debt, those $35 late charges could apply to
a whole lot of people.
Credit card issuers have been bumping up late
fees and over-the-limit fees and shortening grace periods, making it tougher
for customers to pay on time. They've also introduced new fees on overseas transactions
and balance transfers.
The tougher approach is paying off on the bottom
In 2001, the credit card industry had its most
profitable year in 11 years. Pretax return on assets, a key measure of profitability,
averaged 4 percent in 2001, the highest level since 1989, according to R.K.
Hammer Investment Bankers in Thousand Oaks, Calif.
Fee income, the bulk of which comes from penalty
fees, accounted for 31 percent of profits in 2001, up from 28 percent in 2000.
"We expect issuers to raise fee income
for nuisance fees -- late fees, overlimit fees, etc. -- and adopt new fee-producing
services as well," says R.K. Hammer. "Any CEO worth his salt will
consider ways to boost fee income."
Fees and fee income have grown steadily since the mid-1990s. In 1995, just 18
percent of industry profits came from fees.
The average late fee is $26, up from $25.50
in 1999 and $20.90 in 1998, according to the latest survey by Consumer Action.
And there is a good chance that late fees will
continue to ramp up. Credit card issuers are notorious copycats.
As if rising late fees aren't bad enough, more
issuers are zinging late payers with sky-high penalty interest rates as well.
Sixty-nine percent of the issuers surveyed by Consumer Action
will raise interest rates when a customer pays late, compared to 47 percent
Associates National Bank, Direct Merchants Bank and Household
Bank are among the issuers charging penalty APRs as high as 29.99 percent.
Additional penalties popping up
Some issuers have a one-strike penalty policy. One slip up -- pay late or go
over limit once -- and you'll be charged a fee and a penalty interest rate.
Other issuers have adopted a tiered pricing scheme for rule breakers.
For example, GE Select Titanium MasterCard, issued by Bank One's
First USA, has a 2.9 percent teaser rate followed by a variable APR of 11.74
percent. Pay late during the introductory period and the APR immediately shoots
up to 11.74 percent. Pay late twice in any six-month period and an APR of 19.99
slams into place.
Just how long will these sky-high interest rates last? It depends
on your cardholder agreement. Some issuers punish rule breakers for a set period,
say two billing cycles. Other issuers are more vague.
"A good many of them had no way to get back to the original APR,
so it was an indefinite increase," says Deirdre Cummings, consumer program director
at Massachusetts Public Interest Research Group, which released a survey of
100 credit card offers in 2001.
If you mess up, you could be stuck paying a sky-high penalty rate
for quite some time. So watch your step, and be a good card customer. It won't
Fall from grace
Gone are the days when issuers allowed 10 or 15 days for a payment to arrive
after a due date before charging a fee. Thanks to dwindling grace periods, customers
have less time to pay bills after they arrive in the mail.
You've got to be quick with that card payment. If your payment
arrives one day late, you'll be punished.
Some issuers even have early morning posting times. Say your bill
is due at 6 a.m. on its due date. If your payment arrives with the 9 a.m. mail
on the day it's due, it may still be considered late.
"It's part of the strategy of trying to figure out how to get
more people to pay more money," Cummings says.
New fees for other transactions
Credit card issuers also have introduced new fees for balance transfers
and overseas transactions.
Several issuers charge transaction fees of 3 percent to 5 percent
whenever you accept a balance transfer offer. A 4 percent fee on a $1,000 balance
would cost $40. Some issuers cap fees at $35 to $50. Most issuers charge these
fees as soon as a balance is transferred onto a card.
Many banks are also charging 1 percent to 3 percent fees for "converting"
purchases made in foreign currencies into U.S. dollar amounts, although in fact
the banks themselves are doing no converting. It's already done by MasterCard
or Visa, which charge 1 percent for the service.
Why the fee frenzy? Issuers aren't making as much money from finance
charges as they used to. Fierce competition in the credit card business has
driven down interest rates. More consumers are paying off their balances. Issuers,
looking for ways to ratchet up profits, have turned to fees.
With so many issuers charging so many different kinds of fees,
it's more important than ever for consumers to study card offers carefully.
"The most important piece of advice for the consumer is to know
the real cost of the money you're borrowing -- not only the interest rates but
the penalty rates," Cummings says.
"Shop around. Don't rely on what shows up in your mailbox. It's
definitely worth looking at the whole universe of credit cards."
search engine lets you search for credit card offers from banks around the
country. You also can locate the best deals for people who carry balances and
the best deals for people who pay off their bills each month.
Finding a fee haven
If you're sick and tired of credit card fees, you may want to consider getting
a card from a credit union or local community bank. Smaller credit card issuers
have not jumped on the fee bandwagon.
"Community banks are much more service-oriented. They're very
much concerned with serving their customers," says Scott Broughton, senior vice
president of marketing for ICBA Bancard, the credit card subsidiary of the Independent
Community Bankers Association.
"Many of them probably view some of those tactics as almost anti-consumer."
Late fees and over-the-limit fees at community banks range from
$10 to $15. Unlike some larger issuers, you won't be charged an over-limit fee
if you exceed your credit limit by $1.
"That might simply be a good cardholder who needs a credit line
increase," Broughton says.
A card customer would have to exceed a credit limit by 10 percent
before a community bank would charge a fee. Community banks also accept card
payments 10 to 15 days after due dates without penalties.
Credit unions give card customers plenty of leeway as well.
Generally, a credit union will accept a card payment 10 days after
a due date without penalty. Late fees and over-the-limit fees at credit unions
have increased, but average between $12 and $13, according to Credit
Union National Association.
Despite the increased profits in the short term, some experts
wonder if the credit card issuers will pay in the long run for their efforts
to increase fee income.
"Credit card issuers have really backed themselves into a corner
where they're now more dependent on fees and fees that relate to negative behavior,
such as late fees and over-the-limit fees," says George Yacik, vice president
of SMR Research in Hackettstown, N.J.
"That's not a very good plan. That's kind of a dangerous game
-- Posted: March 16, 2003