Eric Gillin

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Avoiding Those Credit Card Blues

Eric Gillin

With total household debt at $7.4 trillion, nearly double the levels seen a decade earlier, credit card companies are raising a variety of rates and fees to control credit quality and keep profits high.

Indeed, such increases are helping to staunch losses accrued by delinquent payments. In the fourth quarter of 2001, credit card companies wrote off $6.30 for every $100 of their portfolios due to bad loans, according to the American Bankers Association. "That's at the highest level since they began tracking the information in 1985," says Keith Leggett, senior economist for the ABA.

Meanwhile, the delinquency rate on credit cards was 3.88% in the fourth quarter of 2001, the second-highest rate ever, Leggett adds.

In reaction, credit card companies have begun raising fees as a means to punish those who don't pay their bills. According to a study from Consumer Action, the average late fee rose 7% in the past year, jumping from $26.00 to $27.82. This is a far cry from the average fee of $20.90 in 1998. "I used to think that $29 would be the new standard," says Ken McEldowney, executive director of Consumer Action. "But now it looks like $35."

With savvy borrowers taking advantage of low-rate cards and falling short-term interest rates sapping margins, fee increases are also used to boost profits. "Fee income is playing a larger part of profits with both credit card issuers and banks alike," says Greg McBride, analyst with rate-tracker Bankrate.com.

But the punishment doesn't end with late fees. An increasing number of companies impose penalty rates after a late payment, which can run as high as 29.49%, according to Consumer Action. Almost three quarters of issuers use penalty rates, up from 69% a year ago.

To add to the punishments, grace periods have become shorter. Traditionally, credit card companies didn't penalize customers if payments came in a day late, but McEldowney says this practice is dying. Seventy-two percent of issuers said they'd hit customers with a late fee if payment wasn't received by the due date, up from last year's 68%.

The normal payment cycle, the time from the billing cycle's end to when payment is due, is about 22 days. McBride says such a short period can often catch consumers by surprise, especially vacationers and business travelers. "If it takes a week for you to receive your statement, and another week before it's posted and you're out of town a week, you've eaten up 21 out of 22 days," he says.

Get Cracking!

Indeed, while credit card companies crack down on delinquent customers, consumers should pare down balances before rates start to rise. The impending federal funds rate hike will likely happen sometime this year, and credit card rates will likely rise too -- a reverse from the sliding rates that helped many borrowers when the Fed cut rates.

"If you're carrying a debt load, it makes sense to pay down as much as possible now that rates are low," McBride says. "Higher rates tend to happen quickly."

The first step: Call your credit card company and negotiate a lower rate. Because of tight competition, creditors are willing to compromise to keep your business. According to a study from the Public Interest Research Group, 56% of those who negotiated were successful, reducing their average annual percentage rate by a third, from 16% to 10.47%.

"You have the ability to go out and negotiate terms," says Joanne Kerstetter, president of the Consumer Credit Counseling Service of Greater Washington. "Creditors before were not willing to do that."

Once you've called the credit card company, shop around for a better rate -- an area for which the Internet is particularly well suited. Bankrate.com lists the best national listings each Tuesday evening, while Cardtrak.com has a searchable database. "There are such a variety of cards to choose from," McBride says. "Evaluate each, given your particular circumstances."

It pays to examine every option, even cards with annual fees. Consider this scenario: You have a $20,000 balance on a credit card with an average annual percentage rate of 15% and no annual fee. Making payments of $500 a month, you'll hit a zero balance in four years and eight months, with $7,899 paid in interest.

While annual fees should typically be avoided, you could do much better if you had the Chase Manhattan Visa with an APR of 4.75% and an annual fee of $85, listed on Bankrate.com. Under the same scenario, you'd reach zero-balance one year sooner, with just $2,156 paid in interest and fees -- and a savings of $5,743.

But if you don't carry a balance, you want a card with no annual fee and the longest billing term, McBride says. Find a card with a billing cycle of 25 days to maximize your breathing room between payments, he recommends. And consider using electronic bill payments to avoid delays in the mail.

When transferring balances, read the fine print and look out for hidden fees. Many companies charge a fee to transfer balances. Others offer "teaser" rates that stay low for a set period of time before jumping significantly.