Credit card penalties, fees get tougher

Credit card penalties have never been more punishing.

Late fees, over-the-limit fees and penalty interest rates keep climbing higher and higher with penalty fees hitting the $39 mark.

Three major credit card issuers have ratcheted up their late fees to $39. MBNA America and Bank of America slap a $39 fee on any customer with a balance of $1,000 or more who pays late. Tardy customers with balances less than $1,000 pay fees ranging from $15 to $29.

Providian charges a $39 late fee to any customer with a balance of $200 or more who misses a payment deadline. Providian customers with balances less than $200 face $19 late fees should they pay late.

This tiered structure for assessing late fees is becoming more popular. According to a survey conducted last year by Consumer Action, a San Francisco-based advocacy organization, 48 percent of the issuers surveyed are using tiered late payments tied to the cardholders balance, compared to 20 percent in 2003.

What's more alarming is that 58 percent of the banks surveyed now have a cut-off time for late payments on the due date.

"What on earth cost them $39 for you being two days late?" asks Scott Bilker, the author of "Talk Your Way Out of Credit Card Debt" and founder of DebtSmart.com. "It's obviously just a way for them to make money."

If late fees based on your balance amount weren't confusing enough, MBNA, Discover, Fleet and Providian now charge tiered over-the-limit fees, with many other issuers following suite. 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 $39.

With the average American household carrying more than $8,500 in credit card debt, all those $39 late fees and over-the-limit fees could apply to a whole lot of people.

Bankrate.com has a chart that rounds up the penalty policies from America's top credit card issuers.

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

2004 was the credit card industry's most profitable year in 15 years. Pretax return on assets, a key measure of profitability, averaged 4.5 percent, the highest level since 1988, according to R.K. Hammer Investment Bankers in Thousand Oaks, Calif.

Fee income accounted for 37 percent of the industry's total revenue. Credit card issuers collected $50.8 billion in fees with 29 percent of that coming from penalty fees.

Harsh as these penalty terms seem, they're becoming more and more typical. Eighty-five percent of issuers surveyed by Consumer Action will raise interest rates when a customer pays late, compared to 39 percent in 2003.

If all that weren't bad enough, many credit card issuers will now raise your interest rate if you slip up with another creditor.

So pay late on your Sears bill and the interest rate on your Citibank credit cards could shoot up.

Credit card companies peek at customer credit reports on a regular basis. Trouble anywhere on your credit report could mean a higher interest rate on your credit card.

"It could accelerate the interest rate on the card in good standing up to 18 to 20 percent," Catherine Williams, vice president of financial literacy with Money Management International.

The best advice for card customers is to keep your credit record as clean as possible.

"Cleaning up that credit report could save you a higher interest rate," Williams says. Get a copy each year from each of the three credit reporting agencies. Here's how to get a free copy.

Review your credit report at least once a year and correct any errors. The last thing you want is to get zinged with a high rate on your credit card because of an error on your credit report.

And most importantly, pay that card bill on time every single month. These tips and payment strategies will show you how:

Mind those payment guidelines: A key step is following your card issuer's payment guidelines precisely. These guidelines are outlined on the back of each credit card bill.

When it comes to processing credit card payments, all these little details are incredibly important. Payment guidelines may include everything from a specific payment address to the time of day by which the payment must be received to be credited that day. Many issuers also stipulate that payments must arrive in the preprinted envelope sent to the customer.