MONEY MATTERS: Penalties, Fees, Tricks and Sleaze

Credit Card Companies are Sneaky and Will Make Money Off You in Any Way Possible.

Penalty Fees Account for a Third of the Industry's Revenue, Twice the Figure 10 Years Ago. In Fact, Card Issuers Make an Estimated $15 Billion Each Year From Various Fees.

In last week's column, I wrote about the massive amount of credit card debt facing many Americans. Some may wonder; is there any way out of this mess? Perhaps.

Firstly, if you're paying an annual fee on your card, maybe you shouldn't be. Many creditors offer cards with no annual fee, but many people, especially those with poor credit, are still paying $35-$50 annually. It's worth finding out if you qualify for a card without an annual fee.

But reducing your interest rate can be even more valuable. If you're paying more than 14% interest, call your bank or card issuer and see if they'll lower your rate to a more reasonable number. There are many other players in this very competitive market place, and they don't want to lose you as a customer. You certainly aren't lacking options.

Even if you succeed in lowering your interest rate, it's quite possible that you’ll get a better deal by transferring your balance to another card. Though it may be just an introductory rate that runs for three, six, or twelve months, some issuers will grant you an incredibly low transfer rate in the single digits -- perhaps even 0% -- potentially saving you hundreds, if not thousands, of dollars.  But beware; the rate may only apply to balance transfers and not new purchases. It’s the sort of catch these companies rely on. They want you to make new purchases at a higher rate so that you’ll increase your debt and decrease the likelihood you'll pay it off before the introductory offer expires. Then you'll have even more debt at a higher rate. Creditors love this sort of thing.

And if you make a late payment, creditors can usually cancel the introductory rate early. In some cases, you may even have to pay interest retroactively on a debt if you haven’t paid it off before the end of the introductory period. Furthermore, some banks may hit you with a balance-transfer fee of about 3%. They're sneaky, and as you'll see below, they'll make money off you in anyway possible.

Creditors are increasingly using what is known as the Universal Default Clause, which allows them to increase your interest rates if you make a late payment on any account, not just on theirs. By checking your credit report, they are able to track your payment history with other creditors. The key is to pay your bills on time to avoid these expensive penalties and fees.

Many people who travel outside the country make purchases with a credit card to avoid currency exchange fees. But some companies are now charging a 3% fee on credit card purchases outside the United States—on top of the 1% charged as a currency exchange fee. And that's not all.

There is also a fee of up to $39 for spending beyond your credit limit, and a fee that ranges between $5-$15 for paying your bill by phone. Some credit card companies will even charge you a fee if you take out a cash advance against your account. And, incredibly, some card companies are now considering a fee for people who pay their balance every month. Even though the card companies make money from vendors every time you use your card, they apparently want money on both ends. So even if you use your cards quite responsibly to secure free loans, beware of this possibility.

It's fairly common for credit cards have a 20 to 30 day grace period. This is the allotted time to pay your credit card bill without being charged interest (if your credit card doesn’t have a grace period, you're being charged interest on your debt as soon as you make a purchase). But if you miss payments, expect your grace period to be reduced. Credit card companies count on the fact that the closer you get to the due date the more likely you’ll miss a payment. That allows them to levy late penalties on you. Since the mid-'90s, late fees have tripled, to about $30 on average, and can commonly run as high as $39. You may have noticed that the payment due date sometimes falls on a Sunday, or a holiday, when banks are closed and mail is not delivered.

But penalty fees aren't the only problem associated with late payments. If you make a late payment on your account, your credit card provider may increase your rate dramatically -- an average penalty of around 23%.

Credit card companies mail an approximate 4 billion solicitations each year. So, by varying estimates, each of us gets, on average, 16-20 annual applications from various credit card companies. Never forget that this is a for-profit industry driven largely by fees. Penalty fees account for a third of the industry's revenue, twice the share it was 10 years ago. In fact, it's estimated that credit card issuers make over $15 billion each year from various fees.

Credit-card companies regularly adjust their rates, penalties and fees, and most of us are unaware. Does anyone ever fully read the card agreement that's sent to us in the mail? It’s doubtful. That's because disclosures now run 20 pages on average, up from a single page just a decade ago. And what you don't know may be costing you plenty.

A good way to avoid late penalties is to make at least the minimum payment immediately. By putting it off, you run the risk of forgetting about it until it's too late. And making a payment just before the due date will barely precede the arrival of your next bill, making it seem as if you always have a payment pending. By paying right away, you'll have about a month before having to think about it again. That way, you'll never be late and you'll never pay a late fee.

And if you're just paying the minimum due, here's something to consider; since your minimum payment is largely interest, paying the minimum will leave your balance relatively unchanged for years or even decades in some cases. This is referred to as reverse amortization. This is when fees and interest exceed the amount you pay each month.

If you're carrying credit card debt, it's best to direct all possible means to reducing, and eventually eliminating, it. Credit card debt is called unsecured debt; unlike a car or a house, credit card purchases can't be easily liquidated to pay off the resulting debt. If you have this sort of debt and are still putting money in savings or most other investments, this is counter-productive. The rate your credit card company is charging far exceeds any savings rate, and most other investment vehicles, so you're simply losing money.

The best advice is to spend within the limits of your budget, view credit cards as free short-term loans, and pay them in full each month. Use the credit card companies to your advantage, and don’t let them use you.

 Sean M. Kennedy, Money Correspondent:

Money Matters, by Gather Correspondent Sean M. Kennedy, is published every Thursday to Gather Essentials: Money.

Money Matters is a practical look at money and how developments in the American economy may affect you.

Sean is a freelance writer based in Los Angeles.

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