The nice folks at consumer-action.org have released the results of their 2007 Credit Card Survey, and some of the information isn't pretty. Sure, it's best not to know how sausage is made, but when it comes to credit cards, a little inside information can help you be a smarter consumer, and it can save you money, too.
So let's review some of the survey's top findings.
First off, consider the practice of universal default, in which card issuers raise your interest rate for all kinds of remote reasons, such as a late payment to another lender, or even a library fine. Because the practice has come under fire recently, many issuers, such as Citigroup
It may not really be gone, though. Most issuers seem to concede that they do check credit reports, and the information they find there can influence the rates they charge. So keep paying attention to the rate you're charged, lest it skyrocket without your noticing.
When you accept a card, sign it, and use it, you're agreeing to the terms of the contract the issuer offered you. Most issuers, though, retain the right to change the terms at any time, for any reason, and sometimes without even informing you. That's why you need to keep an eye on your statements or other mail you receive from your lender. According to Consumer Action, some banks, such as Capital One
Down our throats
Here's another problem cited by the survey: penalties and fees. Consumer Action says:
From 1995 [to] 2007, the average late fee has more than doubled from $13 to $28 -- and fees are as high as $39 per incident. If that's not bad enough, then you get socked with a penalty rate. This year's penalty rates run as high as 32.24% -- on average they are 24.51%. Late payments result in higher penalty rates with 85% [of] issuers -- an increase from the 2005 finding of 79%.
Even if you think you don't need to worry because you're a responsible card user and bill payer, think again. Some of those changes in terms I referred to earlier include shrinkage of the grace period. In other words, unbeknownst to you, you may have much less time in which to pay your bill than you thought. Miss the deadline, and presto -- you face a penalty, often in the form of raised rates. The average grace period is now 22 days, down from more than 25 days in the 1990s.
Other things that can trigger these penalty-rate hikes include bounced checks or exceeding your credit limit. Bounced-check fees range from none at all on the American Express
If you make payments by phone, there are even fees charged for that service. According to the survey, 13 out of 20 banks charged such fees, from as little as $3 to nearly $15 at HSBC
Some good news, and ...
You can stop gnashing your teeth for a few minutes, because there is some good news, too. If your rate does go up, you can call the lender and ask for it to be lowered -- and sometimes, the lender will actually do it. From the survey: "15 banks (75%) said they would lower the interest rate again if the cardholder maintained a good payment record." Some, however, will do so only after you pay on time for several months.
Less encouraging is this news: Your credit limit can get reduced. Many of us are used to seeing it rise over the years, but if you have a poor credit record or credit score, if you're late with payments, if you exceed your credit limit, if you bounce a check, or if you have a rising debt-to-income ratio -- which signals that you're a riskier customer -- your limit can indeed fall, too.
Finally, here are some benchmarks for you. According to Consumer Action, the average purchase interest rate on all surveyed cards is 14.53%. That's up some 2 percentage points over the 2005 survey results, but we can attribute that bump to a general rise in interest rates overall, not to the greed of credit card companies.
As for purchase interest rates, they ranged from 7.9% at Bank of America, with certain fixed-rate cards, to 25.24%, the top-tiered rate that Metropolitan National Bank charges. Meanwhile, among the cards Consumer Action examined, the average fixed rate for cards was 11.34%, and the average variable rate was 15.25%.
Moving on to annual fees, 72% of the cards examined charged no annual fee, up from 67% in 2005. Says Consumer Action:
Annual fees on 23 cards (28%) ranged from $19 (Bank of America, BB&T, and Wells Fargo
(NYSE:WFC)) to $90 (Bank of America US Airways Signature and U.S. Bank Northwest Airlines Signature). The average annual fee on these cards is $44.74 -- a 3% increase from 2005, when the average annual fee was $43.27.
These benchmarks can help you see how well your credit cards are serving you. Clearly, few of us need to be paying any annual fee on our cards. Some rewards cards charge annual fees -- if yours do, make sure the rewards are worth the fee.
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Longtime Fool contributor Selena Maranjian owns shares of no company mentioned in this article. For more about Selena, view her bio and her profile. Bank of America, JPMorgan Chase, and Washington Mutual are Motley Fool Income Investor recommendations. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.