It's estimated that Americans charged $1.8 trillion in 2005 on
the 690 million credit cards outstanding. According to a
Government Accountability Office study released in September,
2006, 13% of credit card users were assessed over-limit fees and
35% were assessed late fees in 2005. So Gwen has a lot of
Let's try to do three things. First, understand what these fees
are. Next, see how fees are changing. And, finally, what Gwen can
do to keep from being hurt.
Credit cards have always had fees. Some, like for a late payment,
are understandable. Others came along as credit cards took on new
capabilities. Think cash advance and balance transfer fees. Still
others, like over-limit fees, seem like they shouldn't be
possible. You would think that they wouldn't allow you to borrow
more than your limit.
There are also 'penalty interest rates'. If you're late with a
payment or go over your credit limit you could see your rate
bumped to 30% or more.
The 2006 GAO study looked at fees and penalties. It said that not
only were fees increasing, but the credit card companies were
doing a lousy job of informing consumers about those fees.
The credit card companies are obligated to tell you about any
fees or penalties and how they're triggered. Some fees, like
paying your credit card bill by phone, are sometimes not clearly
disclosed. What Gwen received with her statement was a notice of
a change in how fees would be charged. And, as long as she's
notified they can get by with almost anything.
Late fees have nearly tripled in the last 11 years. And many
cards have adopted a 'universal default clause' that says a late
payment on any card will trigger the penalty interest rate.
Credit card companies say that the higher interest rates and fees
are appropriate based on risk factors. If it weren't for the
higher fees, they claim that they wouldn't be able to offer
credit to riskier consumers.
In fairness, the GAO's survey found that (at least among 6 of the
largest card issuers) 80% of accounts paid interest rates of less
than 20%. So the vast majority of card users are not paying
But the study also found that the disclosures were written well
above the eighth grade reading level and (surprise!) featured
small print. They recommended that the Federal Reserve Board
revise rules on credit card disclosures.
Now that we understand what's going on we can try to help Gwen
avoid problems. The first thing is to recognize that the card
issuers get to make most of the rules. And, whether those rules
are fair or not isn't relevant. The best she can do is to avoid
getting hurt by those rules.
Get familiar with each account. The only way to know exactly
what's allowed is to read and understand the "Card Member
Agreement." Tough duty. But necessary.
Watch out for unexpected fees. Like for balance transfers or
increasing your credit limit. Know what could trigger fees or
Know exactly when your payment is due. Keep a list of due dates
for your credit card accounts. If you don't get the bill, it's
your responsibility to contact the company and still make a
If possible, the best thing to do is to join nearly half of the
cardholders who paid little or no interest. That's because they
do not carry a balance.
Obviously, for many people that's not immediately possible. Then
it's important to send in your payment as soon as possible. Being
seven days early is better than being one day late.
If you find it difficult to get your payment in on time, you
might want to authorize the credit card company to automatically
debit your checking account for the minimum payment each month.
You'll probably pay for the service, but that way the payment
can't be late.
Talk to your card issuer. If your due date falls at a bad time of
the month, they'll move it.
If Gwen is near or over the limit on any card, she should try to
shift part of the debt to a different card. Some fees are even
being assessed when an account is merely getting too close to the
limit. Your best bet is to keep balances to less than half the
Although the higher late fees are infuriating, they do minimal
damage. The real problem is in the universal default clause. Most
credit card accounts now have a universal default clause.
Suppose your rate went from 15% to 30% on every open credit
account. For every $1,000 you owe, an extra $150 interest would
be charged each year. So if you're the type of person carrying a
$10,000 balance, that one late payment could cost you $1,500 per
year. For as long as you have the balance!
Gwen is right to pay close attention to her credit card accounts.
With newer fees and penalty rates in place, it becomes more
important to manage your credit. In fact, it's critical to your
Gary Foreman is a former financial planner who currently edits
The Dollar Stretcher.com. If you'd like to stretch your day or
your dollar visit The Dollar Stretcher.com. You'll find hundreds
of articles to help you "live better...for less".