Some credit-card issuers are "regularly looking for any kind of change that could justify saying you're a higher credit risk, therefore they're going to impose a higher penalty rate," said Andrea Rock, senior editor at Consumer Reports and an author of the report.
"Some of the major issuers for the first time this year have gone over 30%, based on just one misstep with another creditor," she said.
Rates and fees have skyrocketed since a court ruling abolished credit-card interest-rate limits in 1978, and another ruling in 1996 struck down a limit on fees, she said. "Basically with those ceilings removed, you've seen this steady escalation in both the penalty rates and various fees, and piling on new categories of fees," Rock said.
About 45% of credit-card issuers employ "universal default," where a late payment to another creditor leads to a higher credit-card rate, according to the Consumer Reports study. That study was based on a review of court cases and legislative testimony, an analysis of 10,200 credit-card offers conducted by research firm CardWeb.com, and a consumer survey this summer by advocacy group Consumer Action.
Meanwhile, consumers who sometimes pay off their balances in full might be surprised to learn that some issuers have moved to two-cycle billing, where the only way to avoid interest charges is if you've paid the previous two balances in full, Rock said.
Issuers are offering other rate-hike justifications as well: One consumer's rate spiked to 19.99% from 8.9% for "increased use of her available credit," the Consumer Reports study said.
Industry: 'Consider the risk'
Industry sources say penalty rates and fees reflect the fact that some borrowers pose a greater risk to banks. "These are unsecured loans," said Tracey Mills, spokeswoman with the American Bankers Association.
"It's very appropriate, considering how risky this type of lending is, for a card issuer to readjust the interest rate based on your ability to pay. If you start to show signs that you've become a greater risk, of course it's appropriate for the issuer to adjust your rate on that loan."
Similarly, Mills said she'd understand an issuer requiring her to pay a higher rate based on her late payment to another creditor.
When
asked whether she had ever paid a bill late, she replied: "I'm sure I have.
The credit-card rate is based on risk. If I become a greater risk, I completely
understand having to pay more. When I become a lesser risk, then I pay
less. I have been in a situation where my credit-card interest rate was
lower because I improved my credit rating."
Minimum payments to rise
As well as the possibility of higher rates, consumers who carry over credit card balances from month to month should expect a higher "minimum payment due" soon, as new federal guidelines go into effect by the end of 2005.
"In the long run, that's a good thing because [consumers] are going to be making more of a dent in paying off their balances, but it's something people should be prepared for," Rock said.
"When [federal regulators] saw there was this problem of people making payments for years and not making a dent in what they owed, these guidelines were issued to prompt the banks to require higher monthly minimums," Rock said.
Some creditors require as little as 2% of the balance as a minimum due, but that's changing, with some now saying they require consumers pay the finance charge plus any late fees and 1% of the balance, and other creditors requiring a minimum payment equal to the finance charge and fees, plus $10, Rock said.
Taking care of credit
To ensure good credit-card terms, consumers should shop around. They should realize "fixed rate" means only that the issuing bank must provide 15 days' written notice to raise the rate.
And pay your bills on time.
There's some evidence that issuers are mailing statements closer to the due date, Rock said, so your best bet is paying as soon as you receive your bill, or consider going online for fast turnaround time (though online payments at many issuers' Web sites still take a few days to register).
Also, consider negotiating with creditors for better rates, suggested Consumer Reports. If your credit score is not high enough now to get better rates, pay your bills consistently, bide your time, and ask again after your credit rating has improved.
Finally, if you have a complaint against a credit-card issuer, contact your state attorney general. Visit the National Association of Attorneys General to locate your state attorney general.
Also, complain to the Office of the Comptroller of the Currency. Visit the OCC's consumer page.
Ten good cards
In today's world, with mailboxes often overflowing with credit-card offers, it can be difficult to find the perfect card. Plus, "a lot of the things that seem to be of most concern to consumers are happening across the board with the biggest issuers," Rock said.
Consumer Reports compiled a list of ten cards that stand out because their issuers don't employ universal default policies and don't charge balance transfer fees. The following ten cards also have a grace period of at least 25 days and don't charge an annual fee, according to the study.
As well as the following list of ten consumer-friendly cards, credit unions often offer charge cards with favorable terms, Rock said. To see whether you're eligible to join any credit unions, visit the Credit Union National Association.
The following bank-issued cards offer introductory rates ranging from zero to 3.9%. After the introductory period ends, those rates are followed by a regular rate ranging from 7.99% for the No. 1 card listed, to 11.5% for No. 10 card on the list. (Note that these terms are offered to consumers with high credit scores.)
While
these cards offer more favorable terms than many other cards, they still
charge late-payment fees as high as $35. Still, the Commerce card listed
charges no late fee, and the Town North card charges a late fee of just
$15, according to Consumer Reports.
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