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Tough, new penalties on credit cards

Credit card mistakes have never been more costly.

Late fees, over-the-limit fees and penalty interest rates are sky-high.

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And a misstep on one credit card could lead to rate hikes on the other cards in your wallet.

"There's really no room for errors in today's credit world unless you want to pay the price," says Linda Sherry, editorial director at Consumer Action, a San Francisco-based advocacy organization.

Big, fat fees
Most of the nation's top credit card companies, looking to fatten up already thick profits, have boosted penalty fees to $35.

Citibank, MBNA America and Discover will slap a $35 late fee on any customer with a balance of $1,000 or more who misses 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.

Bank One, Chase Manhattan and Bank of America have similar tiered-penalty policies for late payers. Household Bank and Fleet Bank charge $35 for any late fee, regardless of balance.

If late fees based on your balance amount weren't confusing enough, MBNA, Discover, Fleet and Providian now charge tiered over-the-limit fees. The fee you pay for going over your credit limit depends on the balance you carry. And once again, customers with bigger balances get slapped with the highest fees, often $35.

With the average American household carrying more than $8,000 in credit card debt, all those $35 late fees and over-the-limit fees could apply to a whole lot of people.

For a roundup of penalty policies from the nations top issuers, check out this chart by

The aim of these pumped-up penalty fees is to boost profits. And it's working.

In 2002, the credit card industry had its most profitable year in 13 years. Pretax return on assets, a key measure of profitability, averaged 4.2 percent in 2002, the highest level since 1988, according to R.K. Hammer Investment Bankers in Thousand Oaks, Calif.

Fee income accounted for 33 percent of profits in 2002, with 25 percent of those fees coming from penalty fees.

You read that right. One-third of all credit card profits come from fees, most triggered by customer missteps.

"The fees have reached ridiculous and obscene levels," says Howard Strong, author of "What Every Credit Card User Needs to Know". "It's their new profit center."

Credit card fees and fee income have grown steadily since the mid-1990s. In 1995, just 18 percent of industry profits came from fees.

Pay again and again and ...
Just how tough are penalties on today's credit cards?

Consider the terms of the iAdvantages Platinum MasterCard from Direct Merchants Bank. The card offers zero-percent interest on new purchases for five months.

Charging away for five months without paying a penny of interest is some deal. But just look what happens if a payment arrives late.

Pay late once and an APR ranging from 13.49 to 23.49 percent slams into place. You'll also be slapped with a $39 late fee.

Pay late twice in any six-month period and you'll be slapped with another $39 late fee and a penalty interest rate as high as 29.49 percent.

Harsh as these penalty terms seem, they're becoming more and more typical. Seventy-six percent of issuers surveyed by Consumer Action will raise interest rates when a customer pays late, compared to 47 percent in 1998.


-- Posted: April 25, 2003




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