The good news is that Congress is introducing legislation that would reign in these fees and require credit card companies to have greater transparency in their business practices

Here are the five most commonly practiced credit card abuses to be aware, Good Morning America reports, at least until 2010 when new Federal Reserve rules prohibiting these practices will take effect (”Top 5 Tricks Credit Card Companies Play,” April 20, 2009).

1. Arbitrary Interest-Rate Hikes

Cardholders can zap you with a higher interest rate at any time, even if you have a low-interest rate credit card, since credit card issuers are free to raise their interest rates whenever they want. Card companies can apply the new, higher interest rate to any new charges made on your card, as well as to your existing card balance.

2. Universal Default Rate Increases

A credit card company can hit you with a higher interest rate on your credit card if you’re late on a payment to an unrelated creditor. If your bank finds out that you were late on a payment for your department store card, your bank can choose to raise the interest rate on your bank card, even if you’ve never missed or been late on any of your bank card payments.

3. Lowest Interest Rate Balances First

Card issuers can choose to apply your monthly card payment to your lowest interest rate debt first before applying it to any secondary interest rate debt, if you have more than one interest rate on your credit card. For example, if you take advantage of a card offering a low introductory interest rate on balance transfers, you could see your monthly payment applied to the transferred balance before your payment is applied to the balance with the higher interest rate, which is typically the balance containing any new purchase charges.

4. Payment Due Date Changes

Card companies can arbitrarily change your payment due date with little advance notice, which can often cause you to make a late payment, leading you to incur late fees and sometimes a rate increase on your low introductory rate credit card.

5. Billing Cycle Double Charges

Cardholders can charge you interest on your monthly purchases twice. If you make a purchase but don’t pay off the purchase balance in full in the first month, your card company can charge you interest on the full balance of the purchase for two months. For example, if you put a $200 purchase on your card but only pay off $150 of the charge in the first month, you could be charged interest on the full $200 the first month and be charged interest on the full balance the following month as well, instead of just being charged interest on the remaining $50 balance the second month.

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Approximately 22 million cardholders — all of them consumers who have kept up on their credit card payments, have paid their bills on time, and have maintained their credit — have had their accounts closed or credit limits cut, according to a recent report by Fair Isaac, the creator of the FICO credit score.

Typically, lenders have targeted those with poor credit but as the economy has continued to unravel, lenders have changed their definition of risk, says Josh Lauer, a professor at the University of New Hampshire who is writing a book on credit reporting.

Consumers who have high credit scores tend to use their credit cards less and carry low balances, says Fair Isaac’s Careen Foster, which may be why they’re now being targeted by lenders.

And consumers who pay their bills on time aren’t a very profitable demographic for lenders since these consumers tend to pay few credit card fees, adds John Ulzheimer, president of consumer education for Credit.com. Even though these cardholders are less likely to default, lenders must still set aside reserves in case consumers stop making payments on their loans.

When credit card companies close a consumer’s accounts or reduce a consumer’s credit limit, it can increase the proportion of available credit a consumer is using and bring down his or her credit score, making it harder to qualify for any type of loan in the future, especially for a consumer who already has bad credit.

The good news for those who have been responsible with their credit is that, according to the Fair Isaac report, card companies’ recent credit line reductions have had very little impact on these consumers’ credit scores, perhaps because these consumers have had their credit limits cut by only 5 percent.

Bank analyst Meredith Whitney estimates that by 2010 banks will have slashed another $2.7 trillion of available credit on consumer cards. With lenders continuing to tighten their credit standards, Ulzheimer says cardholders, even those with good credit, can’t afford to be complacent about their credit scores.

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Introduced by Sen. Sheldon Whitehouse, D-R.I., and Sen. Richard J. Durbin, D-Ill., H.R. 627 would protect consumers from credit card companies’ predatory lending practices by limiting their exorbitant interest rate increases.

“The standard credit card agreement gives the lender the power to bleed their customer through evolving and ever more crafty tricks and traps,” Sen. Whitehouse said in a Senate hearing last week (“Debating a Ceiling On Credit Card Fees,” The Washington Post, March 25, 2009). “Under this business model, the lender focuses on squeezing out as much revenue as possible in penalty rates and fees, pushing the customer closer and closer to the edge of bankruptcy.”

The proposed legislation would apply to those companies that raise card rates higher than 15 percent plus the current yield of a 30-year treasury bond, which is currently set at 18.5 percent.

Federal Reserve regulations set to go into effect in 2010 that will target predatory lending practices by credit card issuers would be expanded under the new Credit Cardholders’ Bill of Rights:

• Prevent credit card companies from arbitrarily increasing interest rates on existing card balances

• End the practice of “double cycle” billing that currently allows creditors to charge interest on debt that consumers have already paid on time

• Prohibit lenders from advertising “fixed” rates unless the rates aren’t subject to change, or unless the fixed-rate period is clearly disclosed to the consumer

• Forbid lenders from applying cardholder payments to higher interest rate debts last

• Force creditors to accept payments made the following business day when the bills’ due date is a Sunday or a holiday

• Require creditors to offer more reasonable cut-off times for on-time mailed payments

While banking industry advocates admit that some card issuers have engaged in harmful practices , they say the industry as a whole has not overstepped its bounds and that cardholders issuers could be hurt rather than helped by the new legislation.

If the bill passes, “the market response would simply be to restrict credit, raise interest rates and fees or both,” said Kenneth Clayton, senior vice president and general counsel of the American Bankers Association’s Card Policy Council, in a letter to the Senate subcommittee. “This would significantly hurt tens of millions of Americans at the very time they can least afford it.”

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The average credit card balance nationwide only rose one-third of 1 percent to $5,729 for the fourth quarter of 2008, compared to the 4-percent increase TransUnion recorded at the end of 2007. This marginal increase in credit card spending may be a sign that “consumers are becoming more conscientious about their credit card debt,” says Cliff O’Neal, TransUnion’s senior director of corporate communications (“TransUnion.com Quarterly Credit Card Analysis Reveals Delinquency Rates up 11 Percent from Previous Quarter,” TransUnion, March 9, 2009).

Similarly, delinquency rates — the measure of credit card borrowers who are at least 90 days past due on their accounts — rose only 1.21 percent at the end of 2008, a slightly smaller increase than the year-end figure of 1.36 percent for 2007.

Despite these slight improvements, TransUnion predicts that, as the unemployment rate continues to rise, Americans will continue to fall behind on their credit card payments, reaching a 1.8-percent delinquency rate by the end of this year.

However, the credit bureau is quick to point out that the survey also reveals that Americans are altering their credit-use and debt-repayment habits to possibly avoid being caught without available credit “in a pinch” as credit card issuers, in an effort to minimize their risk, are increasingly slashing credit limits and closing inactive credit accounts.

Discover has already closed 3 million inactive accounts and plans to close an additional 2 million, while Capital One is suspending the accounts of all borrowers who have not used their card in 12 months. Bank of America has closed all zero-balance accounts that have been inactive for at least one year (“Credit Card Issuers: Buy Something or Else!,” The Wall Street Journal, March 12, 2009).

“With all the messages out there about limits being reduced and interest rates going up, people have started to focus on making sure they manage the cards they have,” says Steven Katz, TransUnion’s director of corporate communications.

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But card holders have seen little effort by credit card companies to encourage consumer spending, until now. Certain credit card companies are beefing up their rewords programs to attract new customers, The Wall Street Journal reports (“Spend a Little, Save a Little,” Jan. 16, 2009).

3 Credit Card Rewards Programs With Flexible Options

While most credit card rewards programs usually only offer 1 percent cash back on your purchases, says Curtis Arnold, founder of CardRatings.com, a credit card comparison site, two of the following programs offer 2 percent cash back rewards:

Wells Fargo Home Rebate Card

The Offer: 1% cash back whenever you use your card. Wells Fargo will apply your rewards earnings toward your mortgage loan principal in $25 increments. Rewards apply to most Wells Fargo mortgages.
The Fine Print: No cap on awards.
The Interest Rate: 10.65% to 21.65% after low introductory APR.

Fidelity Retirement Rewards American Express Card

The Offer: 2% cash back whenever you use your card. Fidelity will deposit reward earnings in $50 increments to your Fidelity IRA account, which you can redeem for merchandise and travel rewards.
The Fine Print: No monthly service fees, no annual fee, and no cap on reward points that can be earned or redeemed.
The Interest Rate: 16.99% after low introductory APR.

Schwab Bank Investment First Visa Signature Card

The Offer: 2% cash back whenever you use your card. Schwab will automatically deposit your reward earnings each month into your Schwab One brokerage account. If you choose not to invest your rewards earnings, you can withdraw them as cash funds.
The Fine Print: No monthly service fee, no cap on awards, no annual fee, and no minimum balance requirement.
The Interest Rate: 14.99% after low introductory APR.

These reward programs are unique, says Arnold, “That’s a big carrot they’re dangling. It’s unusual to see two cards with such aggressive rebates.”

Do Your Research Before Buying In

Before jumping into a credit card rewards program, you should remember three key things:

1. Credit card companies can scale back rewards offers at any time.
2. Investment options and associated fees that go along with a rewards program will have to make sense with your spending profile. If you rarely charge purchases, preferring to pay in cash instead, a rewards card may not make sense for you.
3. Once enrolled, you should pay off your balance every month to avoid paying the high interest rates that can be associated with these types of rewards programs.

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With increasing frequency some credit card companies are relying on “behavioral analysis” to not only detect suspicious purchases and protect customers from fraud, but also to determine if a customer’s behavioral patterns indicate that the customer poses a credit risk to the bank itself.

Cardholders who are deemed a risk are getting their credit limits reduced, which could negatively affect their credit score since a reduction in available credit will often affect the ratio of a cardholder’s available credit to credit that is in-use.

Even cardholders who are in good standing with their creditors, but who shop at stores where customers generally have a poor record of repaying their debts could see their credit limits lowered. Kevin Johnson, an American Express customer who has a credit score of 764 out of a possible 850 – considered an “excellent” score by most experts – saw his American Express credit card limit slashed from $10,800 to $3,800 despite his solid credit history with the company.

In a letter sent to Johnson, American Express said among its reasons for reducing his credit limit was the risk posed by other borrowers who had similar shopping histories, a practice called “behavioral scoring.”

“Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express,” the company explained.

Banks Use Data-Mining to Sniff Out Risky Borrowers

Banks may soon use customer data to “weed out” cardholders who are living in zip codes hardest hit by the recession and whose purchasing behavior suggests they are risky borrowers, which Robert Manning, director of the Center for Consumer Financial Services, says is a credit reporting procedure that has been made easier and faster since 9/11.

“Many people don’t understand how almost every transaction they make today could trigger a readjustment in bank analytics,” he said.

Manning, also author of the book “Credit Card Nation,” says more financial institutions may be using behavioral analysis to cut off risky customers before the banks take a loss.

“They’ve crossed the ethical line,” Manning said, “in terms of looking at where you’re spending your money and making a judgment about whether that’s a good or bad decision for you to make given these financial times.”

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Over the last year as unemployment has risen and credit has tightened, consumers have had fewer options to draw on to pay off their debts. Gone are the days consumers could tap into their home’s equity or their retirement savings or take out a consolidation loan, and credit card companies are looking to get paid before things get worse.

“Knowing that the sources of funding have dried up, having someone pay the balance in full isn’t a viable strategy,” said Tim Smith, an executive at Firstsource, one of the country’s largest debt collection agencies.

Collectors Hope to Minimize Looming Defaults

Credit card lenders are expecting to write off some $395 billion in defaulted loans over the next five years, according to projections from The Nilson Report, an industry publication. By comparison, lenders have written off approximately $275 billion in bad loans over the last five years.

Now, companies that formerly could expect payment in full are accepting pennies to dimes on the dollar to settle debts.

“You can’t squeeze blood out of a turnip,” said Don Siler, the chief marketing officer at MRS Associates, a collections company that works with some of the largest credit card companies. “The big settlements just aren’t there anymore.”

To help customers repay their outstanding credit card debts, banks are waiving late fees, lowering interest charges, and reducing loan balances — last year alone, Bank of America reduced the loan balances of as many as 700,000 of its customers.

American Express and Chase Card Services are taking similar actions as more customers fall behind on their bills, The Times reports, and lenders are giving debt collectors more leeway when dealing with debtors who are in financial distress.

Consumers Have Extended Repayment, Settlement Options

Debt collectors are increasingly giving delinquent borrowers extended repayment plans that allows debtors to repay their debt in 12 months instead of the usual six, so that lenders can avoid writing off a debt completely.

Before the economic downturn, Paul Hunziker, chairman of Capital Management Services, said that his firm put only about 25 percent of all borrowers into these long-term repayment plans; now, that number has grown to about 50 percent.

In the most serious credit card delinquency cases, banks are offering to forgive 20 to 70 percent of a consumer’s credit card debt, but such deals could result in a 70- to 130-point drop in a borrower’s credit score that could last for up to seven years.

Troubled borrowers also have the option of negotiating directly with their credit card company to settle their debt, or hiring a debt settlement company to negotiate on their behalf.

Robert Manning, author of “Credit Card Nation” and a longtime critic of the credit card industry, said, “Consumers have never been in a better position to negotiate a partial payment.”

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This month federal regulators agreed to impose some of the most sweeping limitations on the credit card industry seen in decades, preventing credit card companies from raising interest rates on consumers’ current credit card balances.

The new rules, which go into effect in July 2010, state that card companies can only raise interest rates on new credit cards and future purchases or cash advances, unlike now when companies’ credit card contracts allow them to raise consumers’ interest rates indiscriminately and with little warning.

“These protections will allow consumers to access credit on terms that are fair and more easily understood,” Federal Reserve Chairman Ben Bernanke said in a statement.

What the Regulations Mean For You

Fees. Creditors can’t penalize you with high fees for exceeding the limit on a credit card that gets placed on hold. And creditors can’t charge you a security deposit or other fees just for issuing you credit or making credit available.

Billing. Creditors can’t double-cycle bill you, meaning that banks can’t charge you interest on balances that you carry over from one billing cycle to the next. You can only be charged interest on the balance amount that remains unpaid, not the full amount you previously owed.

Balances. Lenders who have borrowers with multiple credit cards will be required to apply any payment that borrower makes above the required minimum toward the borrower’s lowest-rate balance.

Terms. Lenders will be required to give you 45 days notice before they can make any changes to the terms of your account.

Late payments. Creditors have to give you a reasonable period of time to make your payment before it can be considered late.

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Lawyer Laura Hess, owner of Florida-based firms Laura Hess & Associates P.A., Hess Kennedy Chartered LLC, and the Consumer Law Center LLC, has been barred from engaging in any further debt settlement services and will lose her law license for five years.

Attorney General Bill McCollum filed claims against Hess suggesting that she defrauded 18,000 Floridians out of millions of dollars after promising to settle their debts for “pennies on the dollar.” In recent months, McCollum has aggressively sought legal action against debt settlement companies accused of defrauding consumers.

In Hess’s case, McCollum said consumers were falsely told that they did not have to pay creditors, which led to lawsuits and other actions against numerous debtors. Other consumers were told that their creditors would be paid off and that the amount of their debt would be reduced once they started making monthly direct deposit payments. Hess’s customers told NBC 6 that their bills were never paid off, and that in some cases, their credit scores dropped by hundreds of points.

Shortly after McCollum’s office filed the lawsuit, a judge ordered that Hess’ companies be liquidated in order to provide restitution to affected consumers. Some banks have reached settlements with McCollum’s office to help customers who may have been duped by Hess’ companies: Capital One will forgive $1.8 million in debts for 18,000 affected customers, and HSBC will erase the debt of 6,000 of its affected customers.

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In the last 10 years consumer debt has skyrocketed, with credit card balances rising 75 percent since 1999, while family wages have only gone up 4 percent during that same time.

This year in particular, defaults on credit cards are up substantially. As of September, Americans had accumulated $971.4 billion in revolving consumer debt, a 3.4-percent increase over 2007.

These numbers aside, adds Adam Levitin, a law professor at Georgetown University, credit card debt can be considered the barometer for financial problems because families tend to rely on their credit cards when unexpected expenses such as medical or funeral bills arise. Add to that mix a loss of income due to unemployment, and it’s not hard to see why people are struggling to pay their credit card bills and why “Credit cards are in line to fall,” Levitin says.

Record Charge-Offs Suggest Trouble Ahead

In the past, credit card companies have been able to weather economic downturns since they could boost their earnings by increasing customers’ interest rates and fees. Today, however, consumers who are already financially overextended and who have fallen behind on payments are tapped out and are defaulting on their debt in record numbers.

The net charge-off rate — the value of uncollected credit card balances a bank writes off as a loss — could hit 10 percent by 2009, double the yearly default average over the last decade, predicts Innovest Strategic Advisors, an investment research firm. Total charge-offs may reach $18.6 billion during the first quarter of 2009, and just under $100 billion by the end of next year.

“With charge-offs rising so fast and beyond what was expected, the losses those cause will far surpass what companies were hoping to make up with by extra card fees and higher interest rates,” said Laura Nishikawa, an Innovest analyst.

Not only would a credit card collapse wreak havoc on the nation’s credit card companies, explains Joseph Perella, CEO of private financial services firm Perella Weinberg Partners, it would put even greater strain on an already floundering financial sector in which weakened financial companies are at the root of the problem (“Looming Credit Card Debt May be Next Crisis,” Reuters, Nov. 13, 2008).

“Unlike collapses of the past, where the finance industry just brushed it off, kept going, they’re right there at the vortex of the storm,” Perella said. “The industry is the problem, it’s not a subset of it. It’s not a containerized explosion.”

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