By Herb Weisbaum ConsumerMan
msnbc.com contributor
updated 9/20/2007 2:18:29 PM ET 2007-09-20T18:18:29

It has been more than six months since Congress began looking into what Sen. Carl Levin, D-Mich., called the “unfair or abusive” practices of the credit card industry.

In March, bank executives were called to testify before the Senate Permanent Subcommittee on Investigations. So much public attention was focused on the issue at that time that several big banks announced they would modify or eliminate a few of their most egregious practices. Committee members vowed to write legislation to protect American consumers.

So far Congress has done nothing to reduce or limit the exorbitant fees and sky-high penalty interest rates being charged to cardholders. And even though the Federal Reserve cut a benchmark interest rate this week, consumers are about to take it on the chin yet again.

“Credit card issuers continue to make subtle changes to squeeze a little bit more out of their customers,” says Bill Hardekopf of lowcards.com. “We’re seeing it in late fees, cash advance fees, and default fees.”

Hardekopf provided the following examples. Discover just boosted its cash advance rate from 20.99 percent to 22.99 percent.  At the end of September, the penalty for a late payment will also go up.

Right now, the late fee on a Discover card is $15 on balances up to $500 and $39 on balances over $500. For billing periods after Oct. 1, the late fee will be $19 on balances up to $250 and $39 on balances over $250.

Hardekopf says some credit card issuers have figured out another way to generate even more money from late fees. They have added a third tier.

Chase, for example, now charges $15 on balances up to $99.99, $29 on balances between $100 and $249.99, and $39 on balances over $250.

“That’s a real stiff penalty to pay for being as little as one day late,” says Linda Sherry of Consumer Action, a San Francisco-based consumer group. “And when consumers mail in their payment seven to 10 days in advance and they still get hit with a late fee, something is really wrong.”

The Fed's half-point rate cut will eventually trickle down to borrowers who use variable-rate credit cards, says Greg McBride, senior financial analyst at bankrate.com. "But the bad news is that this won't happen overnight, as issuers are much slower to pass along a lower rate than they are to pass along a higher rate," he said.

In any cases, lower base rates will have little or no impact on penalty rates and fees.

One of the most punitive fees created by the credit card industry is called “universal default.” If you make a late payment on any bill or loan reported to the credit bureaus, you could see your interest rate skyrocket to the default rate — even if you have a perfect payment record with that card.

Days before the March congressional hearing, Citibank announced it was eliminating universal default. Capital One testified it did not have a universal default penalty. But many other banks do.

Until now, the top default rate was a ridiculously high 30 percent. Chase just bumped it up to 32 percent. Before long, you can expect to see other banks boost their default rates.

How would you describe an interest rate of 28 percent to borrow money through your credit card? That is what Chase now charges for a cash advance on its standard accounts – 28.24 percent.

Hardekopf calls it “outrageous … almost a legal robbery.”

Other cards are not far behind. The Household Bank MasterCard has a cash advance rate of 25.15 percent. Blue from American Express and Sun Trust’s Visa charge 23.34 percent.

And remember, there is usually a transaction fee of 3 percent or more on top of that outrageous interest rate.

Use your Chase card to get a $1,500 cash advance, and in one year you would pay $465 in interest and fees.

“Cash advances on a credit card are just a bad deal all the way around,” says McBride. “Not only is the interest rate higher on a cash advance than it is for using that credit card for a purchase, but there’s no grace period. So the interest clock starts to tick right away.”

There may be other ways to get the money you need at a much lower cost. Start with your savings. “If you have it, this is what it’s there for,” McBride says. Even if that money is in a high yield savings account, you are only making around 5 percent. Compare that to a cash advance loan at 20 percent to 28 percent.

If you do not have any liquid assets, consider tapping the equity in your house, through a home equity line of credit. This really makes sense if you already have an established line of credit.

The bottom line: Use your credit card to charge things, not as a cash machine.

How to fight back
Get socked with a higher interest rate or penalty fee and you may want to switch to another card. Before you do that, call your credit card company and see if they will do something for you. If you have been a good customer up to this point, they may waive that fee or drop the interest rate a bit.

In its October issue, Consumer Reports surveyed thousands of readers and found that people who call to negotiate a lower interest rate succeed more than half the time; 79 percent are able to get a penalty fee removed.

If you have good credit and your card issuer will not work with you, it is time to shop around for another card. That does not mean jumping at the first pre-approved offer you get in the mail. It means comparison shopping.

You want to compare terms and conditions, not just the interest rate. What are the fees and penalties? How long is the grace period? Does the card have a universal default policy?

“Definitely try to get a card from a credit union if you’re eligible for one,” says Amanda Walker, a senior editor at Consumer Reports. The magazine’s survey (see side box) shows people are much happier with credit cards from credit unions. Many restrictions on membership have been removed, so it is easier than ever to join a credit union.

The Internet makes it easy to shop for a credit card. Here are three sites that let you do that: lowcards.com, bankrate.com,  and cardweb.com.

Democrats in Congress got a lot of positive press this year when they promised to take on the credit card industry. So far, they’ve done nothing to rein in what Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, called the “confusing, misleading and in some cases predatory practices” taking place.

It’s time we held their feet to the fire. It has been all talk and no action. Write the members of Congress from your state and let them know you are not happy with their inaction and want to see some regulatory changes now.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.74%
$30K home equity loan FICO 5.37%
$75K home equity loan FICO 4.71%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.91%
10.91%
Cash Back Cards 16.32%
16.36%
Rewards Cards 15.94%
15.96%
Source: Bankrate.com