Family & Home: Debt Management

Costly Credit Card Tricks
By Stephanie AuWerter

SITTING IN THE back of my closet, I've got a teeny black dress that's about the size of a bathing suit. It's made out of some sort of frightening spandex material that I thought was absolutely fabulous about five years ago, when in a fit of spontaneity I slapped down some plastic and paid a ridiculous $199 for it. Since then, it's sat in my closet, tags still on, waiting for the perfect event. Recently I squeezed myself into it -- and barring some sort of blackmail situation, I can safely say that this item will never, ever see the light of day.

That's especially a shame since I've now probably paid about $400 for it. You see, like 50 million Americans, I have credit-card debt. It's leftover from my 20s, when I was in grad school and then beginning my journalism career here in New York City. Back then my salary barely covered my rent, and, well, a girl's got to live a little.

Slowly but surely, however, I'm paying those cards off. But as more people, like myself, dig themselves out of debt, the cards seem stacked against us. It's appalling enough that the average annual percentage rate, or APR, on a standard credit card these days hovers around 13%, according to Bankrate.com. But worse, many people are still stuck paying rates of 25% or higher. And penalty fees can run as high as $39 a pop.

Does it seem as if you can trigger those penalties just by breathing these days? You aren't far off: Over the past few years, credit-card companies have become increasingly dependent on the fees they charge users. In 2004, Americans paid a whopping $24 billion in credit card fees, according to CardWeb.com. That's an increase of 18% over the previous year. So while it used to be that fees were applied to keep you on the straight and narrow, credit-card companies are now financially dependent on your breaking their rules -- and paying the price. "It's a fact that they are tacking on new fees and more expensive fees," says Travis Plunkett, legislative director for the Consumer Federation of America. "Income from fees has become much more important for profitability."

Credit-card companies are now required to disclose all their various penalties, including their penalty APR for late payments. They also need to state clearly (and in decent-sized print) the permanent rate on a card that comes with an introductory teaser rate. Most of this information is included in what's known as the "Schumer" box (named after New York Democratic Sen. Charles Schumer), typically located on the back of an application.

But some consumer advocates say these rules don't go nearly far enough. "It's a bunch of baloney," says attorney Howard Strong, author of "What Every Credit Card User Needs to Know." "You can say in big letters, 'I'm going to rip you off!' or you can say it in small letters. It doesn't make a difference." Part of the problem, says Strong, is that credit-card companies are lightly regulated. Federal laws don't control things like over-the-limit fees and late charges, he says, and the majority of credit-card companies are located in Delaware or South Dakota -- two states that have lenient usury laws.

In all fairness, though, when you signed up for your credit card, you agreed to play by the rules of the issuer -- who is, after all, giving you an unsecured loan. And while those rules may not be in your favor, they are indeed disclosed.

So do yourself a favor and read the fine print before you sign up for that Molybdenum UltraCard with the $65,000 credit limit and the 2.9% introductory APR. You might be surprised by what you find. And before you do, here's my reader's guide to that fine print -- a list of the costly little devils often hidden among the details by credit-card companies.

1. Looking for Any Excuse
Believe it or not, many credit-card companies will periodically review your credit report looking for late payments on other cards, according to findings from the 2004 Credit Card Survey by Consumer Action (a nonprofit consumer-advocacy group). Why? Because it's an opportunity to raise the interest rate on their card, perhaps by a dramatic amount. The idea here is that if you're making late payments on other debts, you now pose a higher risk regarding all your debts.

So be sure to watch your credit report carefully and make all payments on time to avoid a domino effect on your other lines of credit.

2. Offering "Fixed" Rates That Aren't Really Fixed
You might think that when someone offers you a fixed-rate card, the rate is indeed fixed. But you'd be wrong. A fixed-rate card simply means that the company needs to inform you in writing at least 15 days before changing its rate. So pay attention to the notices that come with your bill. And if you carry a balance, always be aware of the interest rate you're paying. If it goes up, it may be time to shop for a better card.

3. Penalizing Customers Whose Payments Are Five Minutes Late
Have you looked carefully at your credit-card statements lately? These days, not only are payments due by a certain date -- they're often due by a certain time, like, say, 1:00 p.m.

And a late payment could really cost you. Not only will you be charged a late fee (which could be as high as $39), but you may also be charged a penalty APR, which is far more costly. Indeed, you could see your rate soar to 30%, and that new rate may be permanent, according to Consumer Action's survey.

4. Encouraging Minuscule Minimum Payments The key to paying down your credit-card debt is to make payments early and often. Any extra cash you can squeeze out of your budget needs to be applied toward this debt. That's the only way to whittle down your principal.

Unfortunately, the credit-card companies are making it easier than ever to carry your debt endlessly by reducing the amount they require as a minimum payment. While it used to be that you had to pay off at least 5% of your total balance each month that requirement has now dropped as low as 2% with more than half of the cards surveyed by Consumer Action. At that rate it could take you decades to pay off your debt, even if you don't charge anything more to your card.

5. Offering Shorter Grace Periods
The grace period -- or window of time before you begin accruing interest on new purchases -- is also shrinking. While it used to be 30 days, it's now shrunk, on average, to less than 21, according to CardWeb.com. Some cards don't have any grace period at all. Of course, if you carry a balance, there are no grace periods, so it doesn't really matter. But if you pay off your bill each month, looking for a card with a grace period of at least 25 days could save you from unnecessary interest payments.

6. Whacking You Abroad
Using your credit card in a foreign country used to be the best deal in town. That's because, while Visa and MasterCard charged a 1% fee, it was still significantly less than what you'd have to pay if you exchanged currency at a bank or used travelers checks, and you usually got a better exchange rate to boot.

These days, using a credit card overseas is still a good deal -- but it isn't quite as sweet. The issuers have tacked on an additional fee -- usually 1% to 3% -- in addition to the Visa and MasterCard fee, according to Consumer Action's survey. So a purchase might be more expensive than you thought.

7. Baiting and Switching
Just because you're preapproved for a card doesn't necessarily mean that's the one you're going to get after you apply. Once your credit history is reviewed, you might be sent a card with less favorable terms. So be sure to review a new card carefully to make sure it has the terms you expected. If you decide you aren't happy, you can simply not activate the card and close the account.

8. Finding a Better Card
So what should you do if you think your current credit card is costing you too much? Try to negotiate. Grab an offer that you recently received, and get on the phone with your current credit provider to see if they will meet or beat that offer, says Rhode. Tell them that if they don't work with you, you're going to switch cards. Of course, be prepared to see this threat through. Probably the best way to find a new card is to collect the offers you receive in the mail for about six weeks, and then apply for the best one. Alternatively, you can easily search online at Web sites like Bankrate.com for credit-card deals. Just keep in mind that if you don't have perfect credit, you probably won't be eligible for the best offers.

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