The Worst Credit Card Industry Practices

Deals That Are Too Good to Be True

Glossy, too-good-to-be-true credit card offers come at us left and right. The average household receives eight credit card offers each month. In 2006, U.S. consumers received nearly 8.0 billion direct mail credit card solicitations, a 30% increase over the prior year, according to CardTrak. Meanwhile, college students who need to pay for educational needs are solicited several times a week through flyers, on-line advertising and on-campus marketers. Credit card companies rely on many tactics to get consumers to apply.

Low "Teaser" Interest Rates: The low interest rate that convinces a consumer to sign up can expire suddenly, after either 90 days or when you make a supposed late payment, whichever comes first. A temptingly low introductory rate can climb to 20 percent APR or even a penalty rate of 30 percent or higher. These low rates are offered if the consumer transfers a balance from one credit card to another as well—in the hopes that the consumer won’t pay off the balance and ends up paying higher interest once the teaser rate expires.

Freebies on Campus: Credit card companies give out all sorts of trinkets to get college students to apply for credit cards on college campuses. Freebies include low cost airline tickets, tee shirts bearing their college logo or stuffed animal mascots of the school, candy, pizza, frisbees, travel mugs, and more. These marketing tactics mask the unfair terms and conditions contained in the contract.

Product Rewards and Discounts: Credit card companies have designed new programs that offer consumers free merchandise—anything from vacation packages and airline travel to televisions, depending on how often the consumer uses their card. Credit card companies profit from these "rewards programs" by urging consumers to rack up a big balance that earns higher profits on interest for the company. These programs put consumers deeper into debt. A 1% reward doesn't compensate much for a balance with a 25% APR.

Fees, Fees, and Fees

Once consumers sign up, then credit card companies ambush them with shoddy terms and conditions. In 2006, credit card companies made over $17 billion in penalty fees. According to one survey nearly 60% of consumers pay at least one late fee each year. The fees now average $35. New penalty fees combined with other unfair practices drive consumers’ balances sky high.

Penalty Fees: Companies slap consumers with late fees by using practices that make it more likely consumers will be late paying their bills. Many have shortened the time between when a bill is sent and comes due. Most have all but eliminated the grace periods for bill payment, to ratchet up late fee income. Most companies claim a bill is late unless received by 11 a.m. or noon on the due date; and others may change a bill’s due date from month to month. If a consumer tries to avoid a late fee by overnighting a payment, he or she finds out too late that overnight payments require a special address.

Over The Limit Fees: Rather than rejecting transactions that exceed the consumer’s credit card limit, or automatically increasing your limit while authorizing the transaction, issuers often let them go through, then charge a hefty over-the-limit fee—as high as $39, and then raise that consumer to a penalty interest rate as a double whammy. Then, the credit card company repeats the over-the-limit fees monthly until your balance is reduced.

Sky High Interest Rates: Some companies charge penalty interest rates as high as 30-40% APR a year. To prolong their profits at these high rates, they encourage consumers to make only very low minimum payments.

Payment Due Dates and Late Fees: Card issuers are systematically mailing statements closer to the due date, intentionally giving customers less turnaround time. Additionally, cardholders are often confused by changing due dates each month. Late fees have become a major profit center for the credit card industry due to these practices.

Unfair Practices

Perhaps the worst trend in credit card banking is the surge in unfair and at times predatory terms and conditions that take advantage of consumers.

Retroactive Interest Rate Increases: Using a credit card gives you the amazing "opportunity" to buy products and then have their price increase after you already own them. When a credit card company raises your interest rate, it raises it not only for future purchases, but applies the higher rate retroactively to your existing balance, too. That means you’re paying more for things you’ve already bought.

Changing Contracts: Credit card terms keep changing. Read the fine print and find this disclosure: “We reserve the right to change the terms (including the APRs) at any time for any reason, including no reason.” A fixed rate is fixed only until the bank provides at least 15 days notice that it isn’t.

Double-Cycle Billing: One-third of the credit card companies use a billing method which charges interest on credit card debt already repaid by the consumer!

Universal Default: A consumer’s interest rate can skyrocket even if the consumer always pays the bill on time and never misses a payment. Some card issuers will raise the rate if a consumer in good standing to them merely inquires about a car loan, opens a new credit card, or allegedly misses a payment on another account. Watch out, your card company might call this practice "risk-based re-pricing."

Hidden Costs, Including "Pay-to-Pay" Fees: Some fees are not disclosed at all in the materials provided to cardholders. For example, some issuers charge cardholders a $5 to $15 fee to make a single bill payment by telephone or even on the internet; others charge deceptive foreign currency transaction fees or even a $2 to $13 fee for obtaining a single copy of a billing statement or other record.

Mandatory Arbitration: Virtually every credit card contract now also includes an unfair pre-dispute binding mandatory arbitration clause. If you have a complaint, it says you cannot go to court or even join a class action lawsuit, but must instead go to an expensive arbitration hearing, often far from home (you can generally file a lawsuit where you live). Studies have shown that the credit card industry wins over 99% of these cases. Without the threat of lawsuits against unfair practices, the industry can make those practices even more unfair, knowing it can get away with them.

Multiple Small Limit Cards: Instead of raising the limit on your existing card when you ask, some big credit card companies will issue you multiple cards with low balance limits of less than $500. It’s an easy way to make more late fees, and confuse consumers about payment requirements.