Exposing shady credit-card traps
By Ray Martin, CBS.MarketWatch.com
BOSTON (CBS.MW) -- Think you're getting a free ride from your credit-card company because you pay your bill in full each month? Think again.
Faced with fierce competition, a rising number of late payments and pressure on revenues from too many zero-interest balance-transfer promotions, credit-card companies are finding creative ways to siphon more money from your wallet. See related column on excessive bank fees.
While the interest paid by consumers to credit card issuers is running at a whopping $80 billion annually, fees are no small matter. It is estimated that credit-card fees cost consumers about $31 billion a year.
Credit-card issuers have set a number of fee traps that can snare unwitting cardholders. Your best defense is to know what you are up against.
Have you ever wondered why your bank or credit-card issuer provides your statement of account activity for the period that includes the last three weeks of the month and the first week of the following month?
Here's why: Banks and credit card companies have learned that when they delay their customers monthly statements for a week or so, their customers will be more likely to incur fees, thereby increasing the financial institutions fee income.
When a bank CEO explained this concept to me, I was shocked. He even said the industry had a name for this common practice -- it's called "information float."
Big financial companies know how to manipulate the timing of the delivery of customer account data to drive up their profits. Is it legal? Apparently it is. Is it fair? They say all fees and charges are properly disclosed to customers in accordance with the current regulations. If so, they why does it seem so ... shady?
Information float occurs in other sinister ways. Say a cardholder has a balance that is close to the credit limit and she is in a rush to do some last minute holiday shopping. When the cardholder makes her next purchase, even though the transaction puts her over the limit, she is not informed and the transaction is approved. An over-the-limit fee is also charged and she is only aware of this if she notices it on her monthly statement (which arrives later the following month.)
Where fees become particularly lucrative for credit-card companies (and costly for you) is where a simple oversight, such as making a late payment, can trigger several different fees. In this situation, the late fee could also push your card balance over the credit limit, triggering an over-the-limit fee and a hike in the interest rate charged on your balance because your card payment is late and your balance exceeds the limit.
Automatic credit downgrade
Through credit bureaus, your account information and payment activity for all of your credit accounts is now widely available and used by financial institutions. That means that your credit-card issuer can use your late payments on another credit card or loan against you.
According to Consumer Financial Education, nearly 40 percent of credit-card companies say that that they hike interest rates charged to current cardholders who pay late on other accounts.
Other traps set by card issuers include reducing the interest-free grace period from 31 days to an average of about 21 days. As a result, flat-footed customers end up incurring additional interest and late fees.
Card issuers also attract customers with "no annual fee cards." But buried in the fine print of the card agreement is that a charge for a minimum monthly finance fee to all customers, even those who pay their balance in full. This last trap I call the "bait and switch".
Tools of the traps
Knowing how credit-card companies work is important, but you also need to know the different types of fees and what actions can trigger them
Minimum Finance Charge: Many cards are doing away with their annual fee -- less than 15 percent of cardholders now pay these. What many card companies are now doing is replacing the annual fee with a minimum monthly finance fee of $2 to $6, which is charged to your account regardless of whether you pay your balance in full. What this amounts to is charging cardholders a monthly fee, instead of an annual fee.
Over the Limit Fee: Having a low credit limit on your card can backfire when your card charges fees for exceeding the approved credit limit. These fees are added to the cost of each purchase while the card is over the limit, and are typically about $35 for each transaction. What's sneaky here is that the credit-card company will approve the purchase and charge you the fee, even if you have no idea your card balance is over the limit.
Late Fee: Making payments after the due date on most credit cards will cost an additional $15 to $39, depending on the overall balance owed. Many card issuers have shortened the payment due period to 20 to 25 days and payments are often required to be posted to the account no later than the morning of the last day due. Another trap is that payments not sent in the card issuer's preprinted envelope are posted five days after they are received.
Balance Transfer Fee: Unless stated otherwise in a promotional offer, balance transfers are treated as a purchase, which means transfers begin racking up interest charges after the grace period. But the fees don't end there: some cards even charge an additional finance charge of 3 percent of the balance transferred. That's an additional $150 on a balance transfer of $5,000.
Cash Advance Fee: If you need cash in a pinch, getting an advance from your credit will cost you. These fees are typically 3 percent of the cash advance, but not less than a set minimum of about $5. You are also charged interest on the advance and a surcharge imposed by the ATM owner.
Card issuers also charge fees for bill payments by phone, requesting a stopped payment, returned payments and transactions in foreign currencies.
Avoiding the traps
The best advice on how to avoid most credit-card fees is simple: pay your balance early, in full and use online bill pay if you can. If you can't do this, then pay at least the minimum payment early, use the preprinted envelopes and never exceed your credit limit.
Consumers also need to be proactive. For example, before you expect to make a lot of purchases on your card, check your credit balance and limit and request a limit increase if there is a chance it could be exceeded.
In the end, it is you versus the card issuer and the equalizer is information. Read your account agreement, the disclosure statement and your monthly statement of account activity carefully, looking for any extra fees and charges. If you find fees you think are unfair, promptly call the card issuer, and ask for the fees to be refunded.
What they know is that it is more expensive to replace your business than to refund a few bucks in fees. Of course, habitual callers will be less productive, because the card issuer knows you are probably running out of options or are less likely to walk.
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