How Credit Cards Soak You

By Daniel Kadlec

After getting socked with a late fee and finance charge on my Kohl's account in May, I called to plead my case. How could a $45.08 pair of sneakers result in a $70.58 charge? O.K., I was two days late. Still, the $25 late fee and 50-c- finance charge came to a whopping annualized penalty rate of more than 21,000%. A local loan shark would have cut me a better deal. The Kohl's rep's response: "It's perfectly legal, and everybody does it."

Turns out she was right, and so began my education in just how much my credit cards were costing me. Without getting too personal, let's just say my inattention has had a price. Yours might too--especially if, like me, you have been carrying around the same cards for years and have not bothered to check the fine print lately.

Credit-card companies are constantly adjusting their rates, penalties and fees, and understanding all the ways they ding you requires ever more diligence. Disclosures now run 20 pages on average, up from one page a decade ago. And though late fees are hardly new, since the mid-'90s they have tripled, to about $30 on average--commonly going as high as $39. "Sure, they send you notification," says Adam Levin, founder of Credit.com a consumer-education website. "But your eyes just glaze over."

Meanwhile, new fees are sneaking in. Making a comeback is the balance-transfer fee (about 3%). If you transfer $10,000, you could get socked with a $300 charge.

Another addition is a fee for foreign-currency conversions. It has long been thought that the smartest way to purchase goods overseas is with a credit card because you'll get a fair deal switching from, say, dollars to euros. That may still be true. But many cards now tack a 3% conversion fee on top of the profit built into the conversion rate.

What's next? Card companies are weighing a fee for people who pay their balance every month, says Levin. Watch out for that one. Some companies already close accounts that are inactive, which can lower your credit rating. And if your credit rating falls, some card issuers will raise your interest rate to punitive levels--even if you are paying in a timely manner.

A yearly review of your credit cards is a good idea. First, check the annual percentage rate, or APR, which is your total cost of carrying a balance. If you're paying more than 14%, ask why. Look for recurring fees. You may have signed up for a card with no annual fee, but that doesn't mean one wasn't tacked on. There is also a fee (up to $39) for spending beyond your credit limit and one for paying by phone ($15). Penalty fees account for a third of the industry's revenue, twice the share it was 10 years ago.

How can you avoid penalties? Call the card issuer and ask to have them removed. If you are a good customer, the issuer may let you off the hook once or even twice. And when you get a bill, make the minimum payment immediately and another payment as soon as you are able. Managing your credit cards takes some effort; avoiding 21,000% interest is worth it. o

Kadlec's latest book is The Power Years: A User's Guide to the Rest of Your Life