Credit Extras

Forget about how much you are actually buying, when it comes to many people's credit card bills it's the fees that are rapidly increasing, especially the penalties.

The Early Show financial adviser Ray Martin tells co-anchor Rene Syler the ways credit card companies are seeking to boost their bottom lines.

Martin says if you think the only fee you're subject to is one for late payment, you might be in for a shock. Credit card companies are now boosting their own income from a wide list of penalties: late fees, over-the-credit fees and balance transfer fees. And these fees are increasing at a very fast rate.

The bite is becoming increasingly noticeable for consumers, especially those who don't pay their bills on time or often exceed their credit limit. Already this year, a number of major credit card companies have upped their fees on everything from late fees to cash advances. Many other companies are expected to follow this trend.

In the past, credit card issuers would maybe change their fees once every three or five years. But the changing economics of the industry have made such increases almost routine. Less than 15 percent of cardholders now pay an annual fee, which was a common source of revenue 10 to 15 years ago, according to Cardweb.com.

Recently, rock-bottom interest rates have put a lid on the rates issuers could charge their best customers. And due to the competition, many card issuers are luring customers with zero percent rates on balance transfers and new purchases, for as long as a year.

So, according to Martin, card companies are generating income from penalties, and in the process have increased profits from $1 billion to about $13 billion this year. Fees are now likely to account for as much as 39 percent of their income -- which is up from 35 percent in 2003 and just 28 percent as recently as 2000.

Lower interest rates aren't the only thing driving this trend. Martin says more people are delinquent when it comes to paying on time. The percentage of credit card delinquencies rose to record levels in the fourth quarter, according to the American Bankers Association. To card companies, it makes sense to profit from those who continue to be pay late.

Here are a few examples of this trend:

• Wells Fargo will boost the fee paid by customers who exceed their credit limit from $35 from $32. Last fall it also added a new 3 percent fee for customers who transfer balances from other credit cards.
• In May, American Express will raise the over-the-limit fee paid by most of its credit card customers to $35 and the bounced-check fee paid by most of its credit and charge customers to $38. Both were previously $29. American Express also charges a higher late fee for customers who have balances exceeding $1,000.
• Chase also has increased late fees paid by customers who owe more than $250. The company also charges for last minute pay-by-phone fee. It's up from $12 to $14.95.

It might just seem like a few dollars, but it is adding to your debt.

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.

• Information Float
  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 monthly statements for a week or so, their customers will be more likely to incur fees.

  Martin says 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, which is legal.

  Information float occurs in other ways. Say a cardholder has a balance that is close to his credit limit and he is in a rush to do some last-minute holiday shopping. When the cardholder makes his next purchase, even though the transaction puts him over the card's limit, he is not informed of this and the transaction is approved. An over-the-limit fee is also charged, and he is only aware of this if he notices it on his monthly statement, which arrives later the following month.

• Compounding Fees:
  A simple oversight such as making a late payment can actually trigger several different fees. 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 and bill payment activity information for all credit accounts is now widely available and used by financial institutions. 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 that 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, the contract says it charges a minimum monthly finance fee to all customers, even those who pay their balance in full. Martin says the action is called the "bait and switch."

Tools of the Traps
Knowing how credit card companies work is important, Martin says, 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 one. What many card companies are doing instead is replacing the annual fee with a minimum monthly finance fee of $2 to $6, which is charged to your credit card account regardless of whether you pay your balance in full. What this amounts to is charging a monthly, instead of annual, fee. It's all just wording, says Martin, so read the fine print!

  Over the Limit Fee: Having a low credit limit on your card can backfire when the company charges fees for exceeding the card's approved credit limit. These fees are added to the cost of each purchase when the card is over the balance limit. The fees 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 are unsuspecting that your card balance is over the limit. Martin says most companies will let the charge go through, so now you have a higher balance, the over-the-limit fee plus your interest rate if you don't pay your bill in full.

  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. Grace periods, the time between the monthly closing date and when the payment is due, have shrunk steadily over the past decade. 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 sometimes payments not sent in the card issuer's pre-printed envelope are posted five days after they are received.

  Also, many issuers now impose steep penalty rates -- some nearing 30 percent -- on borrowers who are late more than once in payment to them, or even to another issuer.

• Balance Transfer Fee: Unless stated otherwise in a promotional offer, balance transfers are treated as a purchase on some cards, 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. So, Martin says, be careful. Although it might seem like a good idea to consolidate your debt on one credit card, you might end up owing a lot more on already borrowed money.
• Cash Advance Fee: If you need cash in a pinch, getting an advance from your credit card will cost you. These fees are typically 3 percent of the cash advanced, 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. Often times, the interest charged on the advance is higher than interest charged on your "purchases." Again, you must read the fine print.

Card issuers also now charge fees for bill payments by phone, requesting a stopped payment, returned payments and transactions in foreign currencies.

Martin says 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 pre-printed envelopes and never exceed your limit.

Consumers also need to be proactive. For example, before you expect to make a lot of purchases on your card, check your balance and request a limit increase if there is a chance it could be exceeded.

In the end, Martin says, it is you versus the card issuer. And, the equalizer is information. Read your account agreement, the disclosure statement and your monthly 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.