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A Fee for a Credit Limit Increase
The good news: With several Congressional hearings on credit-card industry practices over the past few months, the government is finally taking note of excessive credit-card fees. The bad? The increased attention isn't stopping credit-card companies from finding new, inventive ways to ding you.
Take the RewardZone MasterCard from Best Buy. (The card is issued by HSBC.) Sure, for those who frequent the electronics store, the rewards are great. You earn 4% for each dollar spent at Best Buy, 2% on special promotional categories (say, dining) throughout the year, and 1% everywhere else.
But in the fine print you'll find you could also be charged a fee for requesting a credit limit increase that equals a whopping 50% of the increase amount. "A lot of people looking to improve their credit are eager to request credit limit increases," says Curtis Arnold, founder of the credit-card information web site Cardratings.com. (Under certain circumstances, increasing your credit limits can boost your credit score. Click here for more on this tactic.) But with this 50% fee, he adds, "they have the right to hit you with a $500 fee if you get a $1,000 credit limit increase." Whether or not you're charged a fee depends on your creditworthiness, according to the card's Terms and Conditions.
While credit limit increase fees aren't common with bank credit cards (those not affiliated with a department store or retailer), according to Arnold, they are common with so-called subprime credit cards, which target consumers with bad or no credit history.
There are other fees to watch out for with the RewardZone credit card. The card's minimum finance charge is a whopping $2.50 (most credit cards start at 50 cents to $1.00), which means that no matter how small the balance you carry, you'll pay $2.50 in interest a month. Should all that encourage you to close the card, if you still have a balance to pay off, you'll be charged $3.50 a month -- a new idea in the world of fees, Arnold says. For more on creative fee hikes, click here.
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The Domino Effect
Wonder why your interest rate just skyrocketed? Don't blame the economy. Thanks to a sneaky credit-card policy called universal default, credit cards can jack up your rate for just about anything that's related to your credit score: from being late on another credit issuer's card to applying for a car loan or mortgage. You could even be penalized if your score drops because of an error in your credit report, according to Consumer Action, a California-based consumer advocacy group that issues an annual report on credit-card practices.
Most credit-card issuers deny employing universal default. (Most recently, Citibank announced in a press release it would stop the practice.) But in its 2007 credit-card survey, Consumer Action had half of the 20 banks it contacted say they would raise interest rates based on the information in a cardholder's credit report, says Linda Sherry, a spokeswoman for the organization.
Once your rate goes up, what hoops you jump through to return to your previous rate varies greatly from one card issuer to another, according to Cardratings.com's Arnold. Some require six consecutive on-time monthly payments, while others may require 12 or more.
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Charging Interest on a $0 Balance
A credit card's so-called "grace period" is the 20 or 25 days between when the card company issues your monthly bill and the actual due date for payment. But don't be fooled into thinking that this window is a break from charging you interest. Most credit-card companies continue to charge interest on your entire balance during that time.
This trick, called "residual interest," is decidedly ungraceful for credit-card users who make large purchases and pay them off over several months. Why? Because they are charged interest on their credit-card balance even in the month after they've paid it down to $0, Sherry says.
Here's an example: Say you buy a $900 refrigerator that you pay off in three months, paying $300 plus whatever interest charge you have each month. Then on the fourth month, after you've supposedly paid off the balance, you still receive a bill with an interest charge. That's because the credit-card company has continued charging you interest during your third grace period, or the 20 or so days between receiving your third statement and the date you send in your payment, Sherry explains. "People tend to pay their bills on the due date," she says. "This is opening them up to 20 days of interest charges."
Is this practice common? You bet. "I was amazed to find that 50% of the banks I surveyed use it," Sherry says.
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4. Fixed Interest Rate? Think Again
The credit-card universe breaks down interest rates into two categories: fixed and variable. If you have a fixed rate, you probably think it's, well, fixed, right?
Think again. Your fixed rate could go up just about any time your bank feels like it, as long as it gives you 15 days' notice. (A variable rate card, on the other hand, doesn't have to give you any notification at all.) The average fixed APR was 14.67% in December 2006, according to CardData.com, an industry resource, up from 14.08% in the beginning of the year. At the same time, fixed-rate cards are becoming ever scarcer. In 2006, 86% of all credit cards in use were variable-rate, while five years earlier fixed-rate cards used to outnumber variable-rate ones, according to CardData.com.
5. Getting Dinged Overseas
Traveling overseas? If you use your credit cards, you'll likely pay a 1% to 3% fee -- which is the currency conversion fee charged by credit cards. Of all the banks surveyed by Consumer Action, in fact, only Capital One and Amalgamated Bank of Chicago didn't charge a foreign transaction fee, Sherry says. Clearly, if you travel a lot you should look for a credit card with a low fee or no fee at all.
The good news: A class action lawsuit against Visa, MasterCard, Bank of America, Citigroup, HSBC, Chase, Washington Mutual, and some of their affiliates was recently settled by the banks, which agreed to refund foreign transaction fees paid between Feb. 1, 1996, and Nov. 8, 2006. (You will need to provide an estimate of the dates of travel abroad and the amount paid in fees.) The banks did not admit to any wrongdoing by charging the fee, according to Sherry, nor was the fee banished. But at the very least, banks now have to list the fee separately from the purchase amount. For a claim form, click here.
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