The Early Show

Charging Not So Merrily Along

Brian Dakss

December 7, 2004 / 1:35 PM EST / CBS

A growing number of credit card holders are being hit with dramatically higher interest rates, even if they have made all of their payments on time.

The Early Show financial adviser Ray Martin says some cardholders are seeing their interest rates double, to as much as 29.99 percent.

It's particularly important to be talking about this during the holiday season: The average American household has about $7,500 - $8,000 worth of credit card debt, but that number certainly increases during the holidays, as Americans rush out to buy gifts galore. And shoppers who charge their holiday purchases tend to spend more than those who pay by cash or check.

So who is being hit with these increased interest rates, and why?

It's a case of, "The devil's in the details," explains Martin. Buried in the fine print of many credit card agreements is a "universal default policy."

One example of such a policy comes from Chase Manhattan Bank, a unit of J. P. Morgan Chase, dated October 2004: "The highest rate (28.49%) may be charged if the cardholder is late making a payment to any creditor; this can include phone and utility bills, car payments and the like -- even if credit card payments are made on time."

While this sounds unbelievable, it's perfectly legal, Martin points out. Federal law only requires the company to inform you of the change 15 days before it becomes effective. Some 44 percent of cards report using universal default policies to increase interest rates based on their customers' poor payment records with other creditors, according to a September report from Consumer Action.

The only way to know if your card has such a policy is pull out your card agreement and read all of the fine print. Martin notes that he's referring to "that pamphlet full of tiny type that 99.9 percent of us throw away immediately."

Unfortunately, says Martin, it appears more cards and companies may begin instituting universal default policies. In April, Discover told cardholders that interest rates could rise as high as 19.99 percent for a single late payment. And Discover reserved the right to look back 11 months for a late payment to justify the increase.

Most consumers agree that hiking interest rates like this seems unfair, but the credit card companies counter that they're merely basing rates on risk: If a customer appears to be a bigger risk, meaning, they may not pay their bills, then the credit card companies deserve to protect themselves by charging higher rates.

Of course, it doesn't hurt that charges like this helped credit card companies enjoy their highest profits in 15 years last year, Martin observes. In 2003 alone, they collected $11.7 billion in penalty fees.

If you have been hit with an interest rate increase, Martin suggests you should consider the following options:

Call and negotiate with your credit card company. Explain that rate and payment increases will make it difficult for you to make timely payments -- and make default more likely.

Refinance/replace the credit card debt with a personal loan from a credit union. This can sometimes be done at a lower fixed rate. The local lenders at a credit union can be friendlier and more likely to lend to you based on your reputation in the community. Finally, credit unions are not-for profit organizations, so they don't need to make money off your loan -- unlike credit cards.

Refinance/replace the credit card debt with home equity line of credit, assuming you have sufficient equity in your home. If you are a homeowner, it may be easier to get the money this way. Plus, the interest rate may be lower and the interest is generally tax deductible.

Enroll in a credit counseling service, which will put you on a debt management plan. Once enrolled in a plan like this, credit card companies must agree to lower your interest rate. Remember these companies are basically debt collectors for credit card companies; check with the Better Business Bureau or the Federal Trade Commission to see if there have been any consumer complaints before signing up for their services.

As a last resort, consider filing for personal bankruptcy. Again, do this as a last resort, where there is no income available to repay credit card debt and no assets to use. If this is a likely possibility, never withdraw money from retirement accounts to repay credit card debt: Money in retirement accounts is protected from creditor judgments and cannot be taken by creditors.