If you want to feel good about the credit card industry, consider reading an article other than this one.
If you'd like to know more about the state of the credit card world, read on. I'd like to share some interesting statistics on rate hikes I came across, from Consumer Action's 2005 Credit Card Survey. The folks at Consumer Action address the topic by saying:
Credit card penalty interest rates and universal default rate hikes, often cited as a way for card companies to manage risk, top the list of unfair credit card practices. In its new credit card study, Consumer Action (CA) uncovered the top reasons that lead banks to impose penalty rates. CA's findings show that anyone -- not just people in financial difficulties -- could be subjected to a much higher rate.
It seems that some 45% of card-issuing banks report having universal default policies (which hike rates based on developments in customers' other credit accounts). CA found that the following events can generate an automatic universal-default credit rate hike:
- If your credit score falls
- If you're late making a payment on a mortgage or car loan
- If you exceed your credit limit
- If you bounce a check
- If you have too much credit
- If you get a new credit card
- If you just look into getting a mortgage or car loan
As you can see, some of these reasons seem rather. well, unfair!
The folks at CA noted that "this year, several large banks such as Citibank (NYSE: C), JPMorgan Chase (NYSE: JPM) and [Bank of America's (NYSE: BAC)] MBNA announced their intentions to give cardholders advance notice of such interest rate increases and allow cardholders to 'opt out' of paying them. However, when consumers decline to accept the change, they lose the use of the card." Hmm . that doesn't seem so helpful, does it? (Though I suppose it's better to at least be aware of the higher rate, and not being permitted to add to your debt load on that card may be useful, too.)
More outrages
Then there are other reasons for rate hikes. If, for example, you're late just once making a payment on your credit card debt, you can get socked with a penalty interest rate. CA notes that "the average penalty rate this year is 24.23%, up from the 2004 average of 21.91%." It added: "Late payments result in higher penalty rates with 78.7% of the issuers -- a drop from 85% of the issuers last year. Of the issuers who assess penalty rates, 43.2% said a penalty rate could be triggered by just one late payment." This is up considerably from last year, when only 31% bumped up rates after a single late payment.
Bounced checks trigger fees as well as rate hikes -- some 89% of surveyed banks charge such fees. The average bounced check fee at these banks is $28.61. The fees range from $15 (First Internet Bank of Indiana) to $38 (American Express).
If you go over your credit limit, you might think that your card issuer should just deny the charge, leaving you to find some other solution at the cash register. But no -- usually, they'll accept the charge, but then whack you with a fee. (The current average fee is about $30.)
Keep more of your money
Learn much more about the surprisingly interesting credit card industry in our Credit Center, which also features tips on getting out of debt, along with guidance on how to manage your credit effectively. Really. I mean it. There's some great stuff in our Credit Center, and it's all free reading. (We even offer spiffy Motley Fool credit cards, some of which offer cash back or rewards -- I've got $106 coming back to me on my Fool card.)
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Fool's disclosure policy is scrupulously fair.
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