NEW YORK – Making a mistake with your credit card can cost you a lot of money these days.
The fees that banks and other credit card issuers charge if you pay late or go over your credit limit have been rising fast in recent years, as have penalty interest rates imposed if you’re a frequent violator.
And problems with one card can have a domino effect on other accounts.
Consumers face “outrageous penalties,” often for minor errors, said Linda Sherry, editorial director for Consumer Action, a nonprofit consumer education group based in San Francisco. Those extra fees, she added, “force those already in trouble to go deeper in debt.”
A study conducted earlier this year by Consumer Action found that fees for paying late now average $27.45, up from $26.84 last year.
“The highest we found were $39 at Bank of America, MBNA and Providian,” Sherry said.
Go over your credit limit, and the penalty you’ll pay can be as high as $35, the study found.
While the average interest rate on credit cards nationwide is about 12 percent, the rate you could get hit with if you’ve repeatedly paid late or gone over your limit is nearly 23 percent, the study found.
“It’s very important in this environment of high fees to pay on time,” Sherry said.
There’s another reason to be vigilant: Many consumers aren’t aware that violating the limits on one credit card can have an impact on all their other accounts.
That’s because many financial institutions are checking consumers’ credit reports more frequently. So card issuers not only can penalize you if you’re late in paying their card, but they’ll punish you with a higher interest rate if you’re late in paying another issuer’s card.
This so-called universal default policy is now in effect at more than 40 percent of the nation’s card issuers, Sherry said.
All this is happening because card issuers are deriving more income from penalty fees than in the past. Recent studies have shown that fees now account for 35 percent of card issuers’ income, double the amount a decade ago. Interest earnings make up the rest.
Unfortunately, many consumers can be blindsided by problems that sneak up on them when they least expect it.
CardWeb.com Inc. in Frederick, Md., which publishes data on credit and debit cards, pointed out that “finance charges added to the account on the closing day of the billing cycle can trigger an over-limit fee.”
It also warned that financial institutions have adopted other “gotcha” practices. For example, J.P. Morgan Chase &Co. “will impose a fee if your balance exceeds the credit line anytime during the billing cycle, as opposed to the general practice of hitting you if you remain over limit on the closing day of the billing cycle,” CardWeb.com said.
Consumers also should be aware that many credit card issuers have shortened their grace period, the time between the end of a billing cycle and when the payment is due, said Greg McBride, a financial analyst with Bankrate.com in North Palm Beach, Fla.
Obviously, the very best way to avoid fees is to pay promptly and stay within your credit limit.
McBride said consumers also can do themselves a favor by sitting down and reading the cardholder agreements they get from their credit card issuers, and understanding “that the smaller the print, the more important the words.”
McBride suggests consumers who are too busy or too forgetful about bills should consider electronic shortcuts. They can set up automatic transfers through their bank or open an online banking account that sends out e-mail reminders of bills coming due.
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