On The Hook For Fees

By Daniel Eisenberg

Here's how little faith Steve McNamara has in his credit-card company: every month, rather than simply drop his payment in a mailbox, the Mill Valley, Calif., resident trudges to the post office to send in his Visa bill by certified mail, so he'll have the receipt as proof that he paid on time.

Last year, you see, when McNamara was doing things the conventional way, the credit-card issuer, Chevy Chase Bank (whose portfolio has since been acquired by the First USA unit of Bank One), slapped him with four $29 late fees even though he regularly mailed his check two weeks before the due date. McNamara figures not even the Postal Service could screw things up that consistently, and he's convinced the bank purposely delayed processing his bills, a charge Chevy Chase denies. "They use low introductory rates and send cards to anyone and their dog," says McNamara, "and they have to make it up somehow."

And what better way than with the fine print? Last year the industry mailed a record 3.4 billion solicitations, luring consumers with the promise of low rates and no annual fees. But even as the number of pitches skyrockets, the growth of debt is slowing--and providers of plastic need new ways to bolster their bottom line.

So, in the same way that banks are bombarding customers with ATM and service fees, giants like Citigroup, MBNA, Bank of America and American Express are raising fees, to $20 or $30, for being late or over limit. They're also shortening and rigidly enforcing grace periods on bill payments, upping foreign-transaction fees and imposing penalty interest rates of 20% or more. Some bewildered customers are being punished for not charging enough (inactivity fees). And even if you pay your MasterCard, say, but fall behind on your Discover charge, the MasterCard issuer might raise your interest rate, because you're deemed a greater credit risk.

The last avenue of relief--personal bankruptcy--is about to get tougher too. Congress is close to passing a controversial bill that would make it harder for average Americans to write off bad credit-card debt, though Visa and others insist only well-off deadbeats would be affected.

Now, however, disgruntled cardholders are fighting back, filing a barrage of class actions and calling on Washington to rein in the industry's perceived excesses, such as preying on college students and the poor. In May, President Clinton said the industry should include more information in credit-card solicitations. A bill introduced by Democratic Congressman John LaFalce of New York would do just that. It calls for fuller disclosure about fees, expiration dates of teaser rates and how long it would take to pay off a balance with only the minimum. (For instance, if you paid just the minimum 2% on a $5,000 balance at 15%, it would take you 32 years, and you'd pay $7,700 in interest.) "This is an industry that's run amuck," says Frank Torres, legislative counsel at Consumer Union. "Fees are another way to squeeze money out of consumers."

So far, it's working. In the past few years the average late fee has soared 75%, from around $12 in 1995 to more than $21 at the end of last year, according to Consumer Action. Today charges run as high as $35 a pop, helping propel industry-wide fee revenue, which now accounts for nearly 20% of all revenue, from $10 billion in '96 to $19 billion in '98, according to CardWeb.com Financial giants Citigroup, Bank One and Chase just reported strong second-quarter earnings, fueled by double-digit growth in credit-card income.

Even American Express, which makes much of its money from merchants on its credit and charge cards, is using its popular Membership Rewards program as a fee generator. The company has hiked annual fees in the program 60%, to $40. If you want to link your personal card with your corporate card, that's another $10, please. And if you're late with your card payment, you pay a fee of around $15 and forgo your points for that month--unless you ransom them for another $15. Like many issuers, Amex has added a mandatory-arbitration clause, so customers can't take their disputes to court. At least shareholders are happy. American Express earned a record $2.1 billion last year, and its stock shot up 24%.

In the industry's view, the reliance on fees amounts to a fair deal in which the best customers pay the least--and best doesn't necessarily mean those who have no balance. Instead of charging everyone a uniformly high rate, as in the past, the issuers offer lower rates and punish the offenders. "This is the best time to be a credit-card consumer," argues George McCane, senior vice president of corporate affairs at First USA. "Rates are as low as they've ever been [national average: 15.8%], and for those who meet the regulations of the agreement, they stay low."

To some extent, the industry is trying to wriggle out of a trap of its own making. Competition has knocked down interest rates, and thus more people can pay down debt. Annual interest income has grown from $52 billion in '96 to $58 billion last year, while charges have risen twice as fast, from $798 billion to $975 billion. In March consumers repaid some 15% of their outstanding balances, a 10-year record, according to Moody's Investors Service. "Since they can't get it at the front end, they get it at the back end," says Robert McKinley, CEO of CardWeb.com "It's a fee frenzy, and a backlash may be brewing."

In fact, it's already boiling over. Earlier this year, Trial Lawyers for Public Justice sued Chevy Chase Bank for reneging on the terms of its cardholder agreements. The bank's tactics, the suit claims, were brazen. As a Maryland company, Chevy Chase was barred from charging more than 24% interest. So the bank relocated its offices to Virginia and jacked rates as high as 27%. Chevy Chase says the suit is baseless.

Meanwhile, a similar suit has been brought against First USA, the No. 1 credit-card issuer with 45 million accounts, for deliberately "delaying posting of customer payments in order to charge late fees and penalty interest"--an allegation the company denies. First USA's alleged trick was to mark statements as arriving on time only if they were received by 8 a.m. of the due date. The company has since changed that time--to 10 a.m. In San Francisco, Providian Financial faces lawsuits for allegedly billing customers for services they didn't want, like credit insurance. Providian says the charges have no merit, but recently said it would refund $20 million in inappropriate late fees.

There are other, absolutely legal tricks available to the industry. Bill Anderson, of BankRate.com was surprised to learn that as a reward for mailing in his credit-card payment on time, he would have less time each month to pay. Ron Stadelman has another tale of woe. Last summer the Cary, Ill., real estate agent transferred his balance to a Household Visa card with a 10.4% rate. But within a few months, his account, among others, was purchased by Fleet Bank, which gradually hiked the rate to 26.9% and said Stadelman couldn't close the account until he paid off his entire $8,500 balance. "It's highway robbery," fumes Stadelman. "Credit-card companies used to honor their agreements." Technically, they probably still do, Mr. Stadelman, but only if you read the fine print.

--With reporting by Dan Cray/Los Angeles

With reporting by Dan Cray/Los Angeles