Odd credit-card fees stir calls for reform

Your Money

November 19, 2006|By Susan Tompor | Susan Tompor,McClatchy-Tribune

Imagine that you just picked up a terrific pair of Lacoste sneakers on sale. Then, the phone rings a month or two later. The store is demanding that you hand over more money for the same shoes sitting in your closet.

Crazy talk, huh?

That's how it works in the whacked-out world of credit-card companies. They've got ways to zing you even when you think you're in the clear. Amazingly, they're getting away with it.

For now.

It's getting harder - some might say downright impossible - to be knowledgeable when it comes to credit cards.

It is true many credit cards no longer charge annual fees. And many consumers are paying lower rates than they would have in 1990 or earlier.

New research by the Government Accountability Office, the investigative arm of Congress, shows that many consumers have benefited from some risk-based pricing that allows credit-card issuers to offer better rates to financially solid customers.

Yet any knowledgeable consumer knows it's far too easy to get caught in some trap.

Did you know that your interest rate on some credit cards could go up - without any warning letter - if you pay your insurance bill late or start charging too much on all your credit cards? And that higher rate - sometimes 30 percent - could apply to old charges?

Or did you know that you could be charged $10 to $15 if you want to pay your bill on time, but by phone?

"One way or another, these excesses and unfair practices have got to end," said Sen. Carl Levin, who requested the GAO's detailed study of disclosures, fees, interest rates and billing practices in the credit-card industry.

The Michigan Democrat said in an interview that he's so concerned about the lack of consumer protections that he would introduce a bill to call for more credit-card regulation if the industry doesn't take action itself.

Levin said some practices should be prohibited, such as fees to pay by phone.

"I don't think you ought to be charged a fee if you pay on time," Levin said.

Levin also said consumers shouldn't be charged interest on part of a bill that's already been paid.

Consider double-cycle billing, a practice that a few credit-card issuers use. It allows credit-card issuers to charge interest on money that the consumer has technically borrowed but already repaid.

"It's not fair, and it should be banned," said Travis B. Plunkett, legislative director for the Consumer Federation of America in Washington.

The GAO report offers this example: A cardholder spends $1,000. Maybe he or she buys one big-ticket item, like a new washer, and some other everyday goods.

And say the customer pays, on time, $990 of that $1,000 bill. The $10 balance is carried over into the next month.

How much would the cardholder owe in interest?

With single-cycle billing, the GAO report notes that the cardholder would owe 11 cents in interest charges on that $10.

Under double-cycle, he or she would owe $11.02 in interest charges. The cardholder would be paying interest on the money that was paid on time, as well as the $10.

Consumers who are hurt most by this practice are those who regularly pay their bills in full, but then charge a big-ticket item and pay it off in three or four months.

Then there's the universal default clause that can give many issuers the right to automatically impose a higher rate on your card - including past purchases - based on the way you handle other credit accounts.

"I don't know of another business in America that can get away with raising prices on goods that have already been purchased," Plunkett said.

In its defense, the credit-card industry says consumers only need to shop around, pay on time and follow the rules.

"These are all avoidable," said Kenneth J. Clayton, chief legislative counsel for the American Bankers Association in Washington, said of fees and penalty rates.

Clayton also said risk-based pricing has made credit available to more consumers.

He's correct. Up to a point.

Consolidation in the credit-card industry is reducing competition. And consumers aren't always aware of the ins-and-outs of credit rules.

"You cannot afford to hire a lawyer to understand your credit card," Levin said.

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