Romancing the credit-card holder

The next time a credit-card offer comes in the mail, it might be worth looking to see if the terms are any friendlier.

For example, Chase Card Services elected early this year to scrap the arcane practice of two-cycle billing, in which the average daily balance is calculated over two billing cycles instead of one. The extended duration can result in higher finance charges for those who carry a balance on their card.

In March, Citigroup announced it was dropping two of its credit-card practices: hiking a card customer's rates and fees at "any time for any reason," and the practice of "universal default," where interest rates on a card can be jacked up if the cardholder fails to pay any other bill on time.

And in June, Chase and Bank of America announced programs to help customers better understand and manage their accounts.

To credit-card issuers, the new offerings are designed to please customers. But to skeptical observers, the moves are viewed as efforts to thwart a possible government crackdown.

Amid a raft of complaints about card issuers' practices, the Democrat-controlled Congress has stepped up its focus on cardholders' concerns. The results so far this year: various bills introduced to curb perceived abuses, and several Congressional hearings.

At one hearing in March, Wesley Wannemacher told lawmakers how he went over the $3,000 credit limit on his new Chase credit card in 2001, spending $3,200 to pay for his wedding. Evidently, the charges weren't paid off promptly, and his debt began to pile up. In all, Mr. Wannemacher, of Lima, Ohio, racked up fees and interest charges of $7,500, including 47 over-the-limit fees. And "if they hadn't reviewed my account, I would have paid another $6,110 on a $3,200 debt," he stated.

The reaction to his story was swift: At the hearing, Chase announced it would end over-the-limit fees on accounts that exceeded their credit limit for more than 90 days.

The credit-card industry has responded proactively because "they don't want government regulation," says Ellen Cannon of Bankrate.com. "They feel that if they show good faith, and make some changes to their practices, the government may simply go away."

But that may be increasingly harder to do. In addition to complaints, various studies, including a Government Accountability Office report issued last October, have shed light on today's higher fees. And some of the tougher credit-card practices have affected more than just fringe cardholders with poor credit ratings. They've also "hit mainstream card customers," says Robert McKinley, CEO of Cardweb.com. "That's where the backlash is coming from."

To be sure, consumer advocates say they believe the card industry is entitled to profits – which it clearly obtains. According to Mr. McKinley, pre-tax profits for the bank credit-card industry (not including store cards) last year totaled $37.5 billion. That compares with $27.8 billion in 2002. "For some banks, credit cards are the biggest profit center," he says.

But to some consumer groups, some of those profits stem from deceptive "tricks and traps," and charges that seem to some like gouging. Oft-heard complaints include: fees that pile up and trigger additional charges, such as over-the-account-limit fees; and prolonged penalties, sometimes for slight infractions of a cardholder's agreement. "[Fees for] payments received even one minute late can reach as much as $50 and send a card-holder's interest rate to 30 percent or higher," notes Tamara Draut, of the public policy group Demos, in New York.

The 2007 credit-card survey by Consumer Action, released in late May, showed that the average interest rate on cards surveyed was 14.53 percent. But if cardholders paid their bill late, their interest rate could jump to an average of 24.51 percent, as a penalty, and even reach as high as 32.24 percent. And, among banks with balance transfer fees, six of those surveyed have no caps on the fees charged.

To Curtis Arnold, founder of CardRatings.com, an advocacy group that helps people understand credit cards, the five worst credit card practices are:

•Immediate application of penalties for late payments or exceeding the card's credit limit. This sometimes occurs even if a card payment is received shortly after a specific cutoff time, such as 2 p.m., on a due date.

•The ability to raise an account's interest rate "at any time for any reason."

•Applying payments to balances on the account with the lowest annual percentage rate (APR) instead of the highest. As Mr. Arnold explains, some cardholders use the same credit card for purchases as well as for cash advances and for taking in balances transferred from another card. Since each of these functions usually involves a separate interest rate, any payment typically applies to the balance with the lowest APR, allowing interest on higher-rate balances to mount up faster.

•Use of so-called "trailing interest." For those cards with no grace period, that's the interest charged on their outstanding balance between the cutoff date of their last statement and the date their payment is posted by the issuer. For example, say your statement cutoff date is June 1, and you've carried a balance from your last billing cycle. Although you mail in your payment promptly, it isn't received until June 10. Over those 10 days, that account has continued to accrue interest even though you paid off your balance in full. So, in your July statement you'll be charged interest on those 10 days in June.

•Lack of a cap by some card issuers on balance-­transfer fees. That fee, typically 3 percent of the amount being transferred, was often limited to about $50 or $75. "But some banks have removed that cap, which can create a much larger charge," Arnold says. Thus, "instead of paying a $75 charge, consumers transferring, say, $10,000, to another card would pay a $300 fee."

While Arnold believes such tactics can amount to "gouging," the card industry sees things differently. To card issuers, customers enjoy some decided advantages with today's cards – among them, often no annual fee and, on average, lower APRs than existed 20 years ago. Moreover, credit-card lending is much more broadly available than it was years ago.

But the industry "has to be able to price for the risk" taken with what are, in effect, unsecured loans, notes Ken Clayton, managing director of card policy at the American Bankers Association. "When a consumer we lend to poses a credit risk, we want to [be able to] price that [risk] appropriately. That means higher-risk people bear higher costs, while lower-risk people – which are the majority of Americans – bear lower costs."

To Mr. Clayton, the industry is "more than willing" to work with policymakers to "address concerns without bringing unintended consequences." These could include "higher costs for consumers and reduced access to credit."

But for now, anyway, cardholders seem to be enjoying some unusual opportunities, especially while uncertainty prevails over what Washington might do.

In light of the current political climate, consumers themselves may be able to win better card terms, suggests Arnold of CardRatings.com. "If you have an interest rate you consider high and a good credit score, this would be a great time to ask your card issuer for a lower rate. While the industry is under the gun, you're more likely to get these types of concessions," he says.

How to find the best card deals

Credit cards may come with some dire-sounding fees and practices – names like "universal default" or "trailing interest." But on the brighter side, many offerings also have tantalizing attractions – such as no annual fee, low or 0 percent introductory interest rates, and alluring rewards programs, such as cash-back and airline-travel benefits.

And some offerings have eye-opening perks: Take, for instance, the new Motiva credit card that Discover Financial Services unveiled this year. Users who carry a balance from month to month are rewarded for paying their bills on time. Specifically, when cardholders make on-time payments for six consecutive months, they get back, in cash, their next month's interest as reward. In addition, cardholders get a cash-back bonus of up to 1 percent on all purchases made with the card.

In 2006, American Express rolled out its Clear credit card. This "no fee" offering – no annual, late, or over-the-limit fees – also provides what the company calls "a generous and automatic rewards program." It includes "valuable financial management tools" as well, the company says.

Such multifeatured cards can be ideal for consumers "who don't want a bunch of fees, but still want rewards," says Desiree Fish, a spokeswoman for American Express.

With so many cards available today, consumers may lack the time to sift through the crowded field. Happily, some websites – among them, Bankrate.com, CardRatings.com, and CardTrak.com – can help.

In addition, consumers can visit Consumer Action (CA) online at www.consumer-action.org. Its 2007 Credit Card Survey, for example (the link is currently posted on their home page), lists which card issuers use what kinds of fees and other charges. The report also names the 10 cards in CA's survey with the lowest interest rates.