|Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
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This month on our two credit card statements
are notices informing us that as of Oct. 1st we may be charged "more than two"
late fees or over the limit fees" per month.
What's going on?
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 company.
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
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 penalty
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 timely payment.
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 available credit.
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
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 financial