PLAIN DEALER REPORTER

Sylvia Lovelady of Cleveland mails her Capital One credit card payment two weeks before it's due. Yet 10 times in the last two years, she's been slapped with $29 late fees.

Gayle Cerrito of Fairview Park, meanwhile, has been fighting with Associates National Bank for the last eight months because of $278 in overlimit and late fees on her college-age daughter's credit card. Meggan's card last spring was fraudulently charged with $60 for AOL Internet service (she doesn't even own a computer,) which put the card over its $500 limit. AOL removed the bogus charges, but Associates has refused to wipe out the overlimit fees and in addition has imposed late fees for non-payment of the overlimit fees.

Across America the nation's 145 million credit card holders are getting hit with penalties and extra charges like never before. And consumers are fighting back by filing lawsuits, cutting their debt and switching to debit cards.

Since 1995 credit card revenue from late fees and other charges has increased nearly 300 percent, industry figures show, even though Americans are paying their bills just about as promptly as they did five years ago, according to the Federal Reserve Bank.

"There's been a fee frenzy in the industry, particularly in the last two years," said Robert McKinley, chief executive of CardWeb.com Inc., a leading industry research firm. "Fees used to be cost-driven. Now they're profit-driven."

"It's clear that credit card companies are trying to find new ways to make money," agreed Linda Sherry, editorial director of Consumer Action, a 26-year-old consumer watchdog organization in California. "One thinks it's a good idea, and they all jump on board."

Indeed, the nation's 6,300 credit card issuers have invented lots of charges that didn't exist a few years ago. That's part of the reason the industry last year collected some $24 billion in late fees, overlimit fees, activation fees, annual fees and others.

Not only is there no longer any wiggle room for an occasional slip-up, but even conscientious consumers with immaculate credit and payment histories are getting stung by charges that have no merit and hit with interest rates considerably higher than their initial rate. Because of a 1978 U.S. Supreme Court ruling, credit card companies can follow the laws where they're located, not where their customers live. Half the states have no caps on interest rates or fees.

There are penalties for using your card too much and fees if you go six months without using it.

Fees rack up for overseas purchases, for paying your bill in person at the bank branch, and even for paying your bill on time because 8 a.m. on the due date is too late on some cards.

Besides creating all of the new fees, consumer advocates believe that some companies sneak fees onto bills and hope customers don’t notice.

"They’re out to out-trick you," Sherry said. "Borrowers get charged late fees, but how do you know when your payment got there unless you’re one of those people who send it return receipt? People are just livid."

Lovelady is that and more over the $290 in late fees slapped on by Capital One. She’s complained about every one. "Some of them were waived, but it all depends on who you talk to," said Lovelady, 41, who stopped using the account a year ago. "As soon as I get my balance paid off, I will never do business with Capital One again."

Then there are people like Bob Ulrich of North Ridgeville. The 59-year-old recently got hit with a $29 late fee and some $50 in finance charges, also by Capital One. But Ulrich foiled the company’s tactics because he had a return receipt proving delivery before the due date. The charges were quickly removed.

"Sometimes you have to beat them at their own game," said Ulrich, who uses four credit cards, primarily for airline and auto rebate rewards and pays the balances each month.

Credit card companies aren’t eager to discuss specific billing complaints because of customer confidentiality or concern about lawsuits many of them are currently defending. Capital One delcined to comment. Several that were contacted denied the unfair practices repeatedly cited by consumers.

One that’s often criticized, Providian, has changed many of its policies and practices in the last 18 months, said spokesman Alan Elias.

He said the company has corrected its past billing glitches and adopted an "enhanced customer service program" for its 16 million card holders.

On the company’s late fees, Elias said there’s a two-day grace period and "a very liberal late fee reversal policy."

He added that the company has gone beyond federal requirements by increasing the printed type size of the interest rate and other terms and conditions. "The fine print is not fine anymore," Elias said.

Another company, Wachovia Bank Card Services, defended one of the most aggravating new credit card strategies: the early-morning payment cutoff time used by most major cards. Wachovia’s policy, for example, states that payments received after 7:30 a.m. will be posted the next day.

"It works around our processing times," said Phil Christian, senior vice president/group executive for credit cards for the Atlanta-based company. "Our workers make runs to the post office beginning at midnight. The mail that’s there by the morning is the workload for the day."

Christian stressed that Wachovia, unlike some companies, gives at least a two-day grace period after the due date before imposing a fee.

Christian added that the whole industry looks bad because of accusations against some companies. "We are concerned about it. I want to make sure we’re viewed as responsible."

These days, one late payment can start a punishing domino effect: A significantly higher interest rate from that creditor and others. Many check customers’ credit reports several times a year for negative marks.

"They’re looking for a basis to raise your rates," Cardweb.com’s McKinley said. "They’re looking for you to make a mistake."

Lawsuits fight back Consumer anger over tactics like these has led to dozens of lawsuits in the last two years against nearly every major credit card company.

CitiGroup, MBNA, Providian Financial, First USA and Capital One, to name a few, have been accused of charging late fees when payments were really received on time. Other questionable industry practices include unexpected $100 to $125 activation fees for using the card the first time (such as from FreedomCard), charges for closing an account and penalty interest rate hikes to as high as 25 percent to 32 percent rates when payments are supposedly late.

After several lawsuits against Providian, the company a year and a half ago admitted to erroneously charging late fees to 700,000 customers. The nation’s No. 7 credit card company blamed a computer glitch and paid $20 million in restitution.

Federal regulators last year ordered Providian to pay $300 million in another case for improper charges. Three weeks ago, in yet another case, Providian agreed to a $105 million settlement for improperly charging more than 1 million customers for services they never ordered.

Customers upset over improper late fees and finance charges also led to last year’s $45 million lawsuit settlement by Citibank and a $22 million settlement by Chase Manhattan Corp. Then MBNA paid an $8 million settlement in a class-action lawsuit over misleading advertisements for low-rate cards. It’s currently defending a late-payment lawsuit filed in December.

The list goes on. But in part because of these aggressive practices, credit card profits are soaring. MBNA, the world’s largest independent credit card company, last month reported fourth-quarter profits jumped 33 percent compared with a year ago. Capital One reported a 31 percent rise in fourth-quarter profits while Providian bragged about a 45 percent profit increase.

Then there’s Bank One/First USA. Its fourth-quarter profits dropped 35 percent, largely because it lost millions of its 43 million accounts following its own late-fee controversy.

Why fees grew Why are these companies resorting to so many business practices that infuriate their customers and rankle federal regulators? Several reasons:

The number of companies that issue credit cards has jumped from 5,000 to 6,300 in the last 10 years. Even though credit card debt has grown over the decade, the increased competition means many companies have a smaller slice of the pie.

Credit card companies enjoyed a 6 percent return on assets in the 1980s; now it’s down to 1.5 percent to 2 percent, McKinley said. "Even at 1.5 percent, it’s still good," he said, but creditors embrace new fees as a way to recoup some of those lost profits.

And creditors have found that customers don’t tend to complain about fees. Sometimes they don’t notice, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America in Washington, D.C. "But a lot of it is because people are uncomfortable complaining about something embarrassing, like a late fee."

Because of the increased competition, companies feel more driven to keep their advertised interest rates low and their annual fees at zero.

As recently as 1998, 49 percent of card issuers charged an annual fee. Just a year later, in 1999, that dropped to 27 percent.

While there are more open credit card accounts - 550 million bank cards and 450 million retail cards existed last year - consumers have been getting smarter about their credit in the last two years. More people are reducing their debt.

The Federal Reserve Bank says the percentage of people carrying a balance has dropped from 56 percent in 1995 to 52 percent last year. That doesn’t reflect people who are paying down their debt - thanks to the good economic times of the last few years - and not running up new charges.

And with 67 percent home ownership, others are erasing their debt by rolling it into refinanced mortgages or home equity loans.

As a result, credit card revenue from finance charges has slowed dramatically, to an average of 5 percent growth the last two years, compared with annual growth of 24 percent just four years ago.

Consumer revolt afoot As a result of these practices, industry observers say a consumer revolt is in the cards.

Customers already are turning away from credit cards and reaching for their debit cards as a non-cash alternative. There are more than 250 million debit cards - a 300 percent increase in the last several years. "I think some of it is driven by the hassle of credit cards," said McKinley of CardWeb.

People with low debt or who use credit cards for convenience or reward points will abandon credit cards in droves, observers say, if the industry manages to eliminate grace periods on accounts not carrying a balance. A few companies are already doing it.

But Travis Plunkett, legislative director for the Consumer Federation of America, said most lenders aren’t likely to be brave enough to do that.

"Consumers left First USA in droves. And 2000 was the first time we saw these deceptive practices hurt an issuer’s bottom line. This was a shot across the bow."

A handful of companies are trying to soothe customers with "totally no fee" cards. Wachovia, for example, is testing its "no-hassle card" with no late or overlimit fees - in exchange for a higher interest rate.

But there shouldn’t be a trade-off for fair treatment, Sherry said, particularly considering that millions of consumers are locked into high debt and will never get out if companies hold them hostage with rising fees and interest rates.

Sherry hopes Congress will take another stab at restricting credit card practices through federal law. But she noted that the last major consumer-rights legislation introduced, by U.S. Rep. John J. LaFalce of New York, fizzled after industry pressure.

Fox said the aggressive practices and fees probably will get worse before they get better.

"You would think the lawsuits ought to get attention from the credit issuers that it’s expensive to use these practices," she said. "The only way it’ll stop, I think, is changes in the law."

The Plain Dealer

-- Anonymous, February 04, 2001