The State PIRGs (Public Interest Research Groups) recently released a report called "The Credit Card Trap: How to Spot It, How to Avoid It." Based on a survey of 100 credit card offers during the summer of 2000, it describes various fees and penalties that are charged by credit card issuers. The report is available online at www.truthaboutcredit.org. Below are some highlights:
The average penalty annual percentage rate (APR) was 22.84%. This is eight points higher than the average APR for purchases. As little as one late payment, or even a late payment to another creditor, can trigger penalty interest rates. Some credit card companies can charge a penalty APR if a payment is just one day late. A 5.9% "teaser" rate can shoot past 20% in just one billing cycle.
The survey found that 60% of cards surveyed charged a penalty APR on accounts in default or bad financial standing. Common reasons for charging a penalty APR include missing two consecutive payments and an adverse change in the cardholder's financial condition. Creditors can also assess a penalty APR if a cardholder is in bad standing with other creditors. Thus, if a cardholder makes a single late payment to company A, he or she could be charged a higher APR by Company B or C.
The average late payment fee was $27.61 and fees ranged from $15 to $35. Every credit card in the survey charged a late fee. Credit card companies are reaping more profit from late fee income than ever before. The average late fee has more than doubled since 1992, when the average fee was $12.53. In addition, creditors have decreased the amount of time between when a bill is mailed and when payment is due. As a result, there is a higher chance of a late fee being charged.
Creditors have moved payment-posting deadlines to earlier times of the day, such as 8 am to 10 am. This effectively means that payment must be received the day before in order to be posted on the due date because mail is rarely delivered that early.
The average grace period was 22.6 days. Grace periods are decreasing as credit card companies realize that shorter grace periods bring in more profit. Grace periods generally don't apply if a balance is carried from month to month.
All 100 credit cards in the survey had over-the-limit fees. This is a fee charged to cardholders who exceed their credit limits by as little as a dollar. In addition, a punitive penalty APR often accompanies the assessment of both an over-the-limit fee and a late fee.
Minimum payments have been steadily decreasing from the former industry standard of 5% of a borrower's unpaid balance to as low as 2%. As a result, the required monthly minimum is lower than before but consumers stay in debt longer and pay more interest.
The APR for cash advances on a credit card is often higher than the APR for purchases, a fact that is often buried in the "fine print" of a credit card offer. In addition to charging a higher interest rate on cash advances, many creditors also charge transaction fees. Transaction fees ranged from 0-3% for balance transfers with an average transaction fee of 2.46%.
"Bait and Switch" tactics were also documented. Credit cards that offer low rates reserve the right to send consumers a lower-grade card with a higher APR and fees. This fact is usually stated "in the fine print." Consumers don't know what APR they will get until they receive a card. In addition, the word "pre-approved" in an offer does not mean that a consumer will definitely receive an advertised card or any credit card at all. Consumers applying for a pre-approved credit card offer are still subject to a review of their financial situation.