twitter facebook stumble upon rss

Credit-Card Fees: The New Traps

sign up for the momlogic newsletter Tweet This
WSJ: A new federal credit-card law that takes effect Monday could erase billions of dollars a year in fees and interest charges paid by consumers. But card issuers are already deploying new tactics that could prove costly for even the most cautious cardholder.

The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.

Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.

"There are countless fees that can be introduced and rates can go through the roof," says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.

Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don't pay on time, your interest rate is 29%.

The new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009, couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing bubble and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults as unemployed Americans and other cash-strapped customers stop paying their debts. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will bring more red ink unless there is a miracle rebound.

The banks could be hurt further as consumers try to clean up their finances, especially high-cost credit card debt. The average American was running a credit-card balance of just over $5,400 at the end of 2009, down about $200 from five years ago, according to TransUnion, a Chicago-based firm that tracks credit data. In such an environment, consumers may push back against new card fees or jump to a rival issuer determined to compete by keeping fees low or nonexistent.

All this represents a huge change from three years ago when banks were tripping over themselves to issue credit cards to just about anybody, and consumers were on a spending spree. Banks have pruned many of their more profligate cardholders, and are using higher transaction fees to raise more money from cardholders who pay their bills each month rather than run up huge balances.

The biggest new tactic may be one of the oldest: raising rates. As long as credit-card companies inform you ahead of time and don't make any sudden rate changes, they are mostly free under the law to charge whatever they want. They can raise the rate on new purchases made as long as they provide 45 days notice that they are doing so.

U.S. banks on average increased the interest rate on their credit cards by about two percentage points between December 2008 and July 2009, according to Pew Charitable Trusts, a nonprofit group. Some consumers say that their accounts have been hit with sudden interest-rate increases even if they haven't been late on a payment.

Bank of America says it hasn't raised interest on credit-card accounts since the law was passed last spring, except in the case where a cardholder has repeatedly paid late.

In a statement, Citigroup said: "We understand that customers don't like price increases, especially in difficult economic times. However, these actions are necessary given the doubling of credit card losses across the industry from customers not paying back their loans and regulatory changes that eliminate re-pricing for that risk."

companies also plan to collect more interest by switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are low now. But they give the companies more flexibility to collect a higher rate in the future as long as they alert customers to the terms now. Many card companies have already sent out notices that change the terms of the card contract to a higher or variable rate.

Cardholders should expect to see more fees for extra services, such as requesting a year-end itemization of all your purchases, paper statements or getting extended warranties on purchases. "You're going to see a lot more tricks in terms of fees," said Robert Manning, author of "Credit Card Nation" and founder of the Responsible Debt Relief Institute.

Banks already are reaping more fees on overseas transactions. Not only are they raising foreign-exchange transaction fees--the cost customers pay for purchases made in foreign currencies--but they are expanding the definition of what qualifies as a foreign transaction.

In the past, people who made online purchases from foreign merchants, or who traveled to a country where the purchases are often in U.S. dollars such as the Bahamas, were generally immune from paying such fees. But Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions--even if that purchase is charged in U.S. dollars. Discover Financial Services also began charging a new 2% for foreign purchases last year.

American Express Co., which is known for its lucrative rewards programs, recently added new fees to its co-branded Hilton Hotels, Starwood Hotels and Delta Air Lines cards. Cardholders who pay late will lose their rewards points. They can reinstate them to their accounts if they pay a $29 fee. An American Express spokeswoman said the fees are consistent with policies on its other cards and is aimed at encouraging cardholders to pay their bills on time.

For new customers, the days of 0% teaser rates and no-annual-fee boasts are dwindling. After cutting back substantially on mail offers, card companies are once again trying to woo new cardholders. But this time around, the avalanche of pitches are for cards that have annual fees or balance-transfer fees as high as 5% of the balance.

Avoiding such fees is sure to get trickier. Only about 20% of U.S. credit cards currently have an annual fee, according to industry statistics. But that number will likely rise because most direct-mail card offers are for premium cards loaded with reward programs--but also fees. Plain-vanilla cards that don't have any annual fees (or rewards programs) represented just 11% of mail offers in the fourth quarter, according to Mintel Comperemedia, which tracks credit-card mail offers. J.P. Morgan's Chase card unit and American Express are among those that have recently introduced new cards with annual fees.

Consumers can fight back against some of the industry's tactics. You only need one or two credit cards that are widely accepted. So it can make sense consolidating debt on the card that has the lowest interest rate, assuming it makes sense after taking into account the balance-transfer fee.

True, shedding cards can hurt your credit score. But John Ulzheimer of has a rule of thumb to preserve it while closing accounts: If you are able to keep your overall "credit utilization" on your cards--the amount of credit used as a percentage of your overall available credit--below 10% then closing accounts to avoid paying extra fees could make sense, he said.

So use the card or lose it because there may be a price to pay for inactivity. Fifth Third Bancorp is charging customers $19 if they don't use their credit card in a year.

And there are ways to avoid annual fees. Citigroup is alerting some customers that it is assessing a $60 annual fee on their cards. The cure for that is simple. If you spend $2,400 on the card in a 12-month period, the bank will refund the fee.

Bob Depweg, who owns a security-consulting firm in the Los Angeles area, intends to keep playing hardball in order to what he wants out of his credit-card companies. Since the law was passed by Congress, he says he has successfully convinced American Express to drop its annual fee on his card by threatening to take his business elsewhere. And when Citi raised the interest rate on his wife's credit card to 29.9% from 14%, he closed the account.

Regulations going into effect later this year will place even more constraints on credit-card companies. Starting Aug. 20, card companies will be required to review a customer's interest rate every six months. Consumers will have the right to tell a credit-card company that they don't accept a change of terms in their card agreement. The company will then be required to close the account and allow the customer to pay off the balance under the old terms.

Consumers who carry a balance may want to steer clear of retail cards, which woo customers with discounts. The money you save in the beginning could be eclipsed by the higher rates these cards typically charge as you pay off the balance.

Credit unions often offer lower rates than large banks, although some of their rewards programs are less generous than those of big banks. There are more than 8,000 credit unions in the U.S., and they tend to have pretty expansive definitions of who can join. The criterion for joining some credit unions is as simple as your Zip Code. Navy Federal, the nation's largest retail credit union, offers rates as low as 7.9% on a basic platinum Visa card for three million members of the Army, Navy, Air Force, and Marine Corps and their families.

That compares with an interest rate as low as 11.99% on a Citibank Platinum Select MasterCard, touted as one of the cheapest rates around by, a card-comparison Web site. The average rate at the end of last year was roughly 14%, according to the Federal Reserve.

Besides rates, reward programs are one of the other big considerations in choosing the right card. Cash-back cards are likely to offer the best deals in the new regulatory environment since banks have been making their own reward programs less rewarding. They are shortening the expiration periods, raising redemption fees or implementing earnings caps on rewards.

Although issuers have also been trimming cash-back rates in general--the standard rate today is 1% compared with 3% to 5% a few years ago--consumers can still earn higher rates by shopping in certain categories, such as gas or groceries.

"For the average person, if you're going to do a loyalty rewards program, simple is best," said Mr. Manning of the Responsible Debt Relief Institute. "Take the cash back."

Read more stories moms are talking about.

next: Homeless Man Arrested for Kidnapping Child on Bus
72 comments so far | Post a comment now
Jonblaccck March 30, 2010, 10:34 PM

Hey people… Im completely new here but I can’t wait to commence having/getting some great interactions along with you all! I just thought i would introduce myself to you all so whats up!

hotel buchen muenster April 4, 2010, 2:59 AM

Trouble Circle,agency application day instead representative create lose majority powerful seriously rich index notice safe teaching avoid tall confidence real edge love true cause line lip young for white advantage avoid other propose enable need level immediately expense actually servant dinner shall mark probably author debate now executive existing care normally recommend own fit labour challenge hide wage assessment hour external equally king commitment context police tree secure hair comment direct newspaper deputy nevertheless circle industrial page gain fast surround start enterprise test enough concern call same asset data enjoy package star

cheapviagra8401 August 30, 2010, 5:24 AM

cheapest price viagra us licensed pharmacies [url=]cheapest viagra on line[/url] cheap molde ticket viagra

cheapviagra6577 August 30, 2010, 8:21 AM

cheapest viagra substitute sildenafil [url=]cheap drug retin viagra wellbutrin[/url] cheap herbal viagra viagra

Designer Imitation Handbags September 8, 2010, 5:13 AM

If you are of Christian Louboutin shoes and Designer Imitation Handbags The shoes are designed to create an impression of elongated legs and sexy and romantic and attractive and to give them. It is the kind of control that day meet with the help of these shoes. To see an overview of the latest fashions and trends in the area of the shoe is on the mark, and it will not disappoint you.

merchant accounts September 17, 2010, 7:54 PM

I Thank you for taking the time to discuss this affair. I like your point of view on this matter.

moviese September 24, 2010, 5:54 AM

view full movies for nothing on the internet in high quality HD and also the most recent releases take a look right here [URL=]watch movies online free[/URL]

John Thomas September 25, 2010, 5:35 PM

Whats up ! Love your blog thanks for sharing it with me

moviesh September 27, 2010, 11:11 AM

watch complete movies totally free online in high quality HD along with the latest launches take a look here [URL=]watch movies free[/URL]

Rhoda Stastny October 8, 2010, 5:35 PM

Recently saw your comment on my own blog and that’s how i came to know about your site. Each article I have read is very well written and to the point. I would also like to say, not only are the posts well written, but the design of your web-site is excellent. I was able to navigate from post to post and find what I was looking for with ease. Keep up the great work you are doing, and I will be back many times in the near future

Buy Replica Bags October 9, 2010, 9:35 AM

In the spring of 2010 is the year you will see, many colorful world of fashion is yellow, blue or other pastel colors. Spring symbolizes the color and light clothing. There are new collections of footwear at the door, such as Christian Louboutin, that Buy Replica Bags , the practical and easy-going style of the season can be adapted to represent.

Buy Cheap Replica Handbags October 9, 2010, 4:35 PM

Every female person who has his looks and charm of one of these amazing products have values. It is a statement of femininity. Butler Bag is the Buy Cheap Replica Handbags Rolls Royce brackets indicate that you super-feminine women who want to represent. Said investment style, class and organization at a particular time. The maintenance of a Butler Bag offers a stylish and practical contemporary urban style in his rise, or at lunch with business people, a dinner with friends or enjoy a drink at the bar with some buddies office.

Cheap Inspired Handbags October 12, 2010, 3:20 PM

1st Sequins. These Cheap Inspired Handbags are the last things that you can instantly turn night in the evening. You can make a tank top with lentils and bring them under a light jacket. Turning that dresses just remove the jacket or unbutton.

order hcg drops online October 17, 2010, 7:14 PM

clever post! I think that helps me well. Answers a few questions for me. Thanks!

Designer Luxury Handbags October 25, 2010, 6:38 PM

If you are of Christian Louboutin Designer Luxury Handbags and an aristocrat and businessman with them in the fashion world can not be assigned to something other than Christian Louboutin.

not losing weight on hcg diet October 26, 2010, 4:55 PM

I can easily see that you are a guru at your area! I am starting a internet site soon, and your facts will be very helpful for me.. Thanks for all your assistance and wishing you all the good results in your business.

Pharmf309 October 31, 2010, 6:16 AM

Hello! fbddgec interesting fbddgec site!

Maryellen Torino November 1, 2010, 2:39 AM

Hello, this is a great article, keep up the good work. How about more articles about money and payments.

Pharme652 November 5, 2010, 6:48 AM

Hello! bcedefk interesting bcedefk site!

Pharme76 November 18, 2010, 10:31 AM

Hello! fdbgkdk interesting fdbgkdk site!

Back to top >>