The higher the balance, the higher the late fee

Need another incentive to knock down those credit card balances?

Here's one. If you can lower your balance, you'll pay a lower penalty fee if your payment arrives a day or two late.

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Several major issuers are offering a range of credit card late fees based on a customer's card balance. That's good news for customers with low balances -- they catch a break on fees. It's bad news for folks with big card balances -- they face the highest late fees around.

Citibank, MBNA America and Discover charge $15 late fees to late payers with balances of less than $100.

Paying a $15 fee when a $25 payment arrives late is still quite a slap, but it sure beats the standard late fee of $25 or $29.

Credit card customers with big balances are far less lucky. Late payers with balances greater than $1,000 get socked with $35 fees -- the highest late fee on the market to date. Customers with balances between $100 and $1,000 face $25 late fees for tardy payments.

With the average American household carrying more than $8,000 in credit card debt, those $35 late charges could apply to a lot of people.

Last May, Chase Manhattan rolled out a range of late fees, as well. Late payers with balances less than $150 will face $15 fees. Customers with balances greater than $1,200 will pay $35 late fees. Chase customers with balances between $150 and $1,200 will pay $29 fees for tardy payments.

Industry analysts say charging customers with higher balances higher late fees makes a lot of sense. A card company takes a pretty big financial hit if a customer with, say, a $5,000 balance stops paying altogether.

"With higher balances, there's greater risk. Therefore, it's a smart business decision," says R.K. Hammer, president of R.K. Hammer Investment Bankers in Thousand Oaks, Calif.

Still, is a Citibank customer with a $102 balance really $10 riskier than a Citibank customer with a $99 balance?

Other card companies refuse to cut low-balance customers any slack on late fees.

First National Bank of Omaha has a two-tiered approach to late fees. Pay late and you'll be slapped with a big fee or a bigger fee, depending on your card balance. If your balance is less than $500, you'll pay a $29 late fee. If your balance is $500 or more, you'll pay a $35 late fee.

At Fleet Bank and First Consumers National Bank, the size of your balance doesn't matter. Anyone who pays late gets slapped with a $35 fee.

Penalties boost profits
"The fees are way out of control," says Brad Dakake, a consumer advocate at Massachusetts Public Interest Research Group. "They're not being done to penalize customers that miss a payment. They're being done to maximize profits."

Penalty fees bring in big bucks for card issuers. And unfortunately for consumers, it's likely to stay that way.

Fee income, the bulk of which comes from penalty fees, accounted for 31 percent of profits in 2001, up from 28 percent in 2000, according to R.K. Hammer.

Late fees for credit cards increased by 7 percent in 2002, according to the latest survey by Consumer Action. The average late fee is $27.82, up from $26 the previous year. In 1998, the average late fee was just $20.90.

"I don't know when they'll really stop raising them," says Linda Sherry, editorial director at Consumer Action. "They just keep going up."

And there's no end in sight. Legally, there's little preventing an issuer from raising late fees again. Two key U.S. Supreme Court cases saw to that.

The first case occurred way back in 1978. In Marquette vs. First Omaha Service Corp., the Supreme Court ruled that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States, including states with restrictive interest caps.

When it comes to credit card interest rates, the law in a lender's home state rules. It doesn't matter what kind of rate cap exists in a customer's state.

The same principle applies to credit card late fees. In Smiley vs. Citibank in 1996, the Supreme Court gave national banks free rein on credit card fees as well.

"Late fees and other fees are considered interest for the purpose of exporting those limits to other states," says Michael Donovan, a consumer attorney and partner at Donovan Searles in Philadelphia.

As long as an eye-popping late fee is allowed in a lender's home state, the lender can charge it to customers nationwide.

Because most major credit card companies are based in states with liberal or no usury laws, the sky is pretty much the limit with interest rates and late fees.

The best bet for consumers is to pay credit card bills on time every month. These tips from Bankrate.com will show you how.

Another good strategy is to pay the bill as soon as it arrives -- even if you can only make the minimum payment. Giving your issuer the 2 percent minimum payment it wants ASAP is a great way to guard against late fees.

And you can always send a bigger payment later on when you've got more cash.