I was reading Newsweek the other day and came across a startling statistic: "Americans blew more than $24 billion on credit-card fees last year, an 18% jump from 2003, says CardTrak.com. It's more than we spent on milk and eggs." Yowza. That's more than $220 per U.S. household. The amount itself is frightening, and the growth rate even more so. A Consumer Reports article noted that card companies have experienced a 150% increase in penalty-fee income since 1998.
What's going on?
Blame capitalism, perhaps. Card-issuing companies, such as MBNA (NYSE: KRB ) , J. P. Morgan Chase (NYSE: JPM ) , American Express (NYSE: AXP ) , Capital One Financial (NYSE: COF ) , Wells Fargo (NYSE: WFC ) , and Citigroup (NYSE: C ) , are finding that they can reap big profits by charging hefty fees.
Consumer Reports listed some card-fee trends:
- Whereas we used to have a full month in which to send in our payment, many of us now have to get our checks in within 20 to 25 days. This means there are more late payers, and more late fees (which typically range from $15 to $39). Worse, "your payment often must arrive on the morning of the due date, not later in the day, to be officially received. And if you don't use the preprinted return envelope, some card-member agreements allow the issuer to record receipt of your payment five days after it actually arrives." (If you're close to your limit, being socked with fees can actually (and ironically) result in an over-the-limit fee.)
- Interest rates are now being raised on borrowers when payments are late. And, incredibly, if you're late with one card, your rate on other cards might rise. (Learn more.) In fact, being late paying other kinds of creditors can have this result -- even a late electric bill may get your interest rate hiked to 20% or 30%.
- Perhaps the most un-Foolish fee I've heard of is the "no-balance fee," where some cards are charging a small fee if you pay off your bill in full -- which is what you should be doing!
Consumer Reports ended with a bit of scolding: "Bankers say they must impose charges to cover their costs. Those costs, however, seem to be amply covered by the other $31 billion a year in annual fees, cash-advance fees, balance-transfer fees, and merchant fees. Plus, of course, $80 billion in interest charges." Good points!
But let's not just blame these firms. Let's blame consumers, too. Many of these fees are ones we don't have to pay. Of the $24 billion in fees paid in 2004, $15 billion is from penalty fees -- ones fairly easily avoided if you're a careful card user and timely bill payer. Some $3.5 billion collected was from annual fees -- which you can pretty much avoid by choosing a no-annual-fee card. (Tips on picking a good card.)
If you have trouble paying on time, consider looking into setting up automated withdrawals from your bank account to your credit card company, either to pay each bill in full or to make the minimum payment. (Hint: Aim to always pay these bills in full. If you're having trouble doing so, you're charging more than you can afford.)
LongtimeFoolcontributor Selena Maranjian does not own shares of any companies mentioned in this article.