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Credit card late fees continue to climb

A new study confirms what many shoppers have long suspected: credit card fees continue to skyrocket. Among the findings: the top 10 credit card issuers have raised late fees by 23 percent in the past 3 years

A new study confirms what many shoppers have long suspected: credit card fees are skyrocketing.  The study, conducted by California-based Consumer Action, found late fees have jumped as high as $39 -- a penalty that is assessed in addition to finance charges. Credit card issuers frequently charge the fee if payment is only a single day late, or in some cases, a few hours late, the study found.

Consumer Action found the highest late fee, $39, was charged by Bank of America, MBNA and Providian.

The study confirms other data released by industry watchdogs.  According to, the top 10 credit card issuers have raised late fees 23 percent in the past 3 years.

Often, the late fee is actually higher than the minimum payment required by the company, said Linda Sherry, spokeswoman for Consumer Action.  For example, a consumer with a $1,200 balance on a Chase credit card would owe $24 as a minimum payment -- but if that payment is late, a $35 fee kicks in.

"Why make the minimum payments so low and charge people a late fee after one day?" Sherry said.  The number of banks that give consumers a break when their payment is late plummeted in the last year -- from 38 percent to 22 percent.

The survey studied 140 credit cards from 45 issuers.  To obtain its research data, Consumer Action posed as consumers and applied for cards at each bank.

Jim Donahue, a spokesman for MBNA, defended the company's right to impose late fees.

"Being assessed a late fee is entirely within the customers' control," he said.  "And 95 percent or more of our customers pay their bills on time and are never assessed a late fee."

Universal default criticized
Another troubling finding, Sherry said, was the increased use of a controversial practice known as "universal default" by the credit card issuers.  Banks now regularly check their customers' credit reports for signs of late payments on any of their bills.  In fact, credit reporting agencies now offer daily account reviews, with names like “notification services,” and “risk triggers,” to alert credit card firms of any late payments.  Any reported late payment can be used to trigger increased credit card interest rates, even if all payments to the card issuer are up to date. 

"We just don't think that's fair," Sherry said.  "People should have ability to choose who they are going to pay. It's still possible to keep some creditors current while letting others go." Interest fees can jump from single digit teaser rates to 20 percent or more overnight.

The study found that last year 39 percent of credit cards had universal default policies; this year, the figure jumped to 44 percent.

Robert Manning, author of Credit Card Nation, and outspoken critic of the industry, described universal default policies as "outrageous."

"It's a system weighted against the consumer.... This would never happen in Europe because of privacy laws," he said.  "When I spoke in Paris recently, they were astounded it was legal, and at how commonplace that is ... They are just looking for any excuse to raise the interest rate."

Manning said low mortgage rates have threatened credit card profits in recent years, as many consumers take out low-interest loans against their homes to pay off high-interest credit cards -- so the firms have engineered increases in fees to cover the gap.  In 1996, credit card fees raised $1.7 billion; last year, the figure jumped to $11 billion, he said. 

An industry publication, Credit Card Management, reported in its May edition that 2003 was the most profitable year for credit cards since the magazine began tracking the industry in 1992.

"The fact that late fees are up to $39 for no reason, that's just free money for the credit card firms," he said.

Firms must price for risk
On the other hand, credit industry analyst Laura Kaster of Sandler O'Neill & Partners defended the companies' right to penalize customers who don't pay their bills on time.

"I'm not an apologist for the credit card industry... but when they have a client who is late, they have to price for that risk," she said.   Fees are actually becoming a smaller percentage of total credit card revenue she said, as firms are beginning to shy away from high-risk consumers. Credit Card Management agrees, saying in its May edition that late fee income declined 5 percent last year.

But late fees are only part of the story for consumers, who find even a single late payment can have serious consequences.  According to the Consumer Action study, about 30 percent of banks said a single late payment can trigger an increase in the card's interest rate.  Providian charges a "penalty" interest rate of 29.99 percent, the study found. The average penalty interest rate jumped 1.38 percent to 22.91 percent in the past year.

Also, over 95 percent of banks charge "over-limit" fees of $10 to $39 for each month consumers maintain a balance higher than their credit limit.  Most consumers don't realize they have surpassed their credit limit, Sherry said, because most think an over-limit purchase will simply be declined.

One way to avoid late fees is to set up automatic payment of minimum balances using online bill-paying systems, Sherry said. And consumers who slip up just once often have luck calling and negotiating with their bank, she said.

"If this is the first late fee you've ever had, call the bank they will probably waive it," she said.  "But don't call up and start yelling. And if you are repeatedly late, you need to look at why you are late."