Credit Card Companies Stiffen Fees Penalties Go Up For Late Payments, Exceeding Limits

Credit card companies are starting to make sloppy users pay dearly for their mistakes.

After years of lenience for fear of losing customers, banks and other card issuers are now driven by a different motive: thirst for fee income. They’re boosting rates for tardy payers and raising penalty fees for spenders who exceed credit limits.

Credit card experts and cardholder groups are critical of the new fees, saying they’re exorbitant. They accuse issuers of seducing customers with offers of low rates and burying the charges in fine print.

Cardholders can end up with an annual percentage rate twice as high as the one they signed up for. On top of that, they have to pay multiple penalty fees if they pay late or surpass their limit a few times.

“If a person is chronically late, that should be penalized, but based on what we’ve seen, a lot of the time the punishments don’t fit the crime,” said Ruth Susswein, executive director of Bankcard Holders of America in McLean, Va.

Issuers counter that the fees offset higher costs associated with servicing negligent customers and encourage people to clean up their act.

Citibank and AT&T, the nation’s two largest credit card issuers, are cracking down on cardholders who break the rules. Citibank, with 34 million cardholders, in April began raising rates for some late payers to 12.9 percent plus the prime bank rank, up from its standard rate of prime plus 9.4 percent.

AT&T, with 23 million cards, beginning in September will raise rates for tardy payers to 11.9 percent plus the prime rate.

The company also is raising fees for exceeding charge limits or bouncing a payment check to $15 from $10. AT&T raised late payment fees to $15 from $10 earlier this year.

Other big card issuers are following. In September, Chase Manhattan Bank, the nation’s fifth largest card company with 13 million cardholders, will start levying a $15 monthly charge against customers when their balance goes $100, or 5 percent, over their limit. Previously the bank didn’t charge an over-limit fee.

Customers are notified of the changes in their statements and through special notices. Issuers say the charges are necessary because their costs rise when they must send reminders or carry charges for late payers.

They also say it’s more fair to customers who play by the rules of their cardholder agreements.

“Those people shouldn’t have to subsidize the people who don’t pay on time,” said Mitch Montagna, a spokesman for AT&T Universal Card.

But credit card experts say there’s another reason for the punishments. Competition has forced many card issues to offer lower rates and waive annual fees, which has hurt profits. Now they’re trying to make up for it through “risk-based pricing,” industry parlance for penalty fees.

“Fees have become much more important,” said Bob McKinley, president at RAM Research Corp., a Frederick, Md.-based firm that tracks the credit card industry. “Most of the profits are in interest charges, and when they go down, companies have to replace that with something.”

Average rates have fallen from around 21 percent a few years ago to around 18.3 percent now, according to RAM Research.

Issuers say they’re careful about fining people with good payment histories, and say that if they penalize cardholders by raising the interest rate, they’ll change the rates back within a year if cardholders pay on time.

But some issuers are penalizing customers that they consider higher credit risks, even if they haven’t missed a payment. Capital One Financial Corp., a Falls Church, Va. issuer spun off by Signet Banking Corp., examines cardholders credit records and will change their rates if customers carry a lot of debt or have a history of late payments on other cards or loans.

“A risk assessment can’t be based on just one piece of your credit picture,” said Liz McLean, a Capital One spokeswoman. “It’s like car insurance - if you’ve had a lot of tickets, you pay a higher rate.”

The cardholder group has received a dozen complaints from Capital One customers, and many have said that they were never advised of the changes, said Susswein.

The policy is explained in the cardholder agreement when a customer signs up and a notice is sent out 35 days to 40 days before the changes are made, McLean said.

Susswein said the best way to avoid penalty fees is to pay bills on time and stay within charge limits. But if you’re late with a payment and get fined, she said there’s plenty of other credit card offers available.

“Take your business elsewhere,” said Susswein.