Credit debt can exact high price

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Late payments often trigger penalty charges

Detroit Free Press
Reprinted with permission
Show up a tad late to a baseball game? Not a big deal. Finally send a long-overdue thank-you note? Most of us would be thrilled to hear from you.
Think it’s OK to drag your feet paying that credit card bill? Are you really ready to see your interest rate double?
Many consumers have no idea how high the rates on their credit cards can go—and how much taking on credit card debt to buy everyday goods can cost—if they pay late.
“It is quite shocking when it’s assessed on you—and it’s very, very financially painful,” said Bill Hardekopf, the CEO of LowCards.com.
“The penalty rates themselves are as high as ever.”
Read your credit card agreement. It’s pretty common for a credit card issuer to bump that rate up to nearly 30 percent on future purchases if you’re late.
The Credit Card Accountability, Responsibility and Disclosure Act of 2009, which largely went into effect last year, gave consumers many protections. But most consumers are befuddled about how high interest rates can go if they’re late paying that credit card bill.
I’ve talked to some readers who think that they can never be slapped with a higher rate if they pay late.
Not so.
As of June 25, Bank of America will resume a penalty interest rate that could be as high as 29.99 percent on future purchases and transactions.
“A late payment won’t automatically trigger a rate increase—we’ll review the account to determine if it’s appropriate to raise their rate on future transactions,” said Betty Riess, a spokeswoman for Bank of America.
You’d be notified at least 45 days in advance if you’re going to be hit with a penalty rate.
The actual rate would depend on the customer’s creditworthiness, but would not exceed 29.99 percent.
This isn’t a new deal. Bank of America dropped its previous penalty rate—up to 29.99 percent—in February 2010.
Some consumer groups would like to see federal limits on penalty rates.
If you read the terms for your credit card, you will discover that late payments commonly can drive up the cost of borrowing to nearly 30 percent.
Many big issuers—Citi, Chase, Capital One, American Express—have some type of penalty rates.
The American Express Delta SkyMiles Credit Card, for example, has a penalty rate with a variable rate that is 23.99 percent plus the prime rate, so it’s now 27.24 percent.
The penalty rate applies if you make one or more late payments or make a payment that is returned.
The new credit card act protected you to some degree.
Everyone should know when their card payment is due—due dates must now be the same date each month.
Any amount paid beyond the minimum due now also goes toward the balance with the highest rate.
And there are protections as to when a rate can go up on existing balances.
“The rate on your existing balance will not go up unless you’re 60 days late,” said Gerri Detweiler, a personal finance expert for Credit.com.
A few years ago, consumers got whacked hard when card issuers raised rates on previous purchases for practically any infraction. The fees adding onto fees and the higher rates pushed consumers over the financial edge.
Now, credit card issuers cannot raise rates on an existing credit card balance unless:
* That zero-percent introductory rate expires. Card issuers can raise rates once a promotional rate expires. In general, a promotional rate must run at least six months. (I have seen some offers with zero percent for the first 12 billing cycles on purchases.)
* The prime rate or another rate index goes up. A credit card issuer can use a variable rate for the everyday interest rate on the card—and the rate will go up on previous purchases when rates in general go up.
* You paid 60 days or more late. The interest rate on past and future purchases would go up if you’re extremely late.
Consumers can forget or overlook that interest rates on future purchases can easily go up.
“They may not even notice this happening,” Detweiler said.
But look at your credit card bill. You’d see a “Late Payment Warning” at the top.
“If we do not receive your minimum payment by the date listed above, you may have to pay a late fee of up to $35 and your APR will be subject to a maximum Penalty APR of 29.99 percent,” read one statement for a Chase card.
Go to the bottom of that bill to find your actual interest charges.
Of course, no one wants a credit card rate of 30 percent.
It’s bad enough to be paying 15 percent.
“People don’t usually factor in a penalty rate into their thinking,” said Ruth Susswein, the deputy director of national priorities for Consumer Action. “We don’t expect to do anything to deserve it.”
If you borrowed $4,000 on a credit card with a 15 percent rate and made only the minimum required payments each month, it would take you 22 years plus $5,580 in interest to pay off that balance, according to a repayment calculator at http://www.federalreserve.gov/.
What happens at 30 percent?
The Fed says you’d never pay it off if you made only the required minimum payments each month.
A calculator at Bankrate.com says you could pay off $4,000 in debt on a credit card with an annual rate of 30 percent in 36 months — if you paid about $170 a month. (If that card stayed at a 15 percent rate, you’d pay it off eight months sooner with payments of $170 a month.)
One good part of the Credit Card Act of 2009, though, is that consumers do have a reprieve if they’re hit with a penalty rate.
After six months of being a good customer, the credit card issuer is supposed to go back and review your higher rate.
Credit card experts say you’d want to be paying on time—especially after getting slapped with a penalty rate. And you’d want to make sure you make the minimum payments—and then some.

Tips for avoiding high credit card penalties
How to avoid high penalty rates on credit cards:
* Sign up for a free e-alert to remind you that your credit card payment is due. Due dates are the same each month.
* Make all credit card payments on time—and pay at least the minimum required. Sending $10 when the minimum payment is $25 won’t spare you a late penalty.
* If the rate goes up as a penalty, make future payments on time for six months in a row and then contact your issuer to see about getting that rate lowered.
* Do not borrow anywhere near the maximum amount allowed on your credit line if you’re trying to get your rate lowered after six months with a penalty rate.
* Pay attention to the rate on your card each month. If you have a high rate, stop charging until you pay off the entire balance.
* Watch your spending. Check your rates. You do not want to go out and put a major purchase on a credit card if the rate on future purchases has gone up to nearly 30 percent.