More games the credit-card companies play

By Liz Pulliam Weston
MSN Money

Millions of Americans who carry credit-card balances won’t benefit from the latest Federal Reserve cut. That’s because their variable-rate accounts have already hit “floors,” or minimum interest rates, and lenders won’t let them fall any lower.

Meanwhile, the average rate charged on standard, fixed-rate cards in the past year has actually gone up.

Welcome to the topsy-turvy land of credit cards, where fixed rates change and variable rates don’t.

Logic-defying interest charges are just the latest trend in the credit-card wars, where lenders fight each other savagely for market share and then stick their customers with the bill. As I wrote in the two previous columns, "Don't fall for these stupid credit-card tricks" and "4 scary new ways creditors gouge you," lenders increasingly rely on new fees, surprise interest-rate hikes and other “gotchas” to improve their bottom lines.

Lenders aren’t nearly as reluctant to cut rates on other types of loans. After the Fed dropped the key federal funds rate by one-quarter point to 1% -- a 45-year low -- banks responded by dropping their prime rates to 4% from 4.25%. The prime determines the cost of many variable-rate loans, such as home-equity lines of credit. Rates on adjustable mortgages and new-car loans started to drop as well.

Watching the deterioration
Credit-card companies, though, are watching their balance sheets deteriorate thanks to more delinquencies and a soaring number of bankruptcies, says Greg McBride, analyst for Bankrate.com.

That’s one of the reasons why fixed rates on standard credit cards rose slightly in the past 12 months, to 13.74% from 13.57%, even as the Fed chopped a total 2.75 percentage points off short-term rates.

That’s not to say that credit-card rates haven’t budged at all. Since the Fed started cutting rates in January 2001, the average rates on most types of cards have fallen, just not by as much. The average rates on most cards are still two to three percentage points higher than they would be if they fully reflected all the Fed’s trims.

Many credit-card lenders have instituted “floors” to lock in their profits. More than 25% of all variable-cards now have minimum interest rates, and credit-card analysts say the vast majority hit those floor before the latest rate cut. (If you’re not sure about your cards, check the fine print of the agreement you received when you got the card, along with any updates the company sent since then. Or call your credit-card issuer and ask.)

Watch for the tricks they play
These aren’t the only ways credit-card issuers are trying to boost profits. In addition to the many tricks and traps I wrote about earlier, lenders have come up with some new twists. Consider:

Debt-cancellation and debt-suspension contracts
Consumer advocate Birny Birnbaum says these largely unregulated contracts have all but replaced credit insurance and made a bad deal even worse.

Like credit insurance, debt-suspension and debt-cancellation contacts are marketed to people who are worried about paying their bills if they die, become disabled or lose their jobs. But the contracts tend to cover less and cost even more than credit insurance, which was ridiculously overpriced.

“The typical payout on a credit-insurance policy was 30% to 50% of the price of benefits,” says Birnbaum, head of the Center for Economic Justice and a former Texas insurance commissioner. That means the companies returned 30 cents to 50 cents in benefits for each premium dollar collected. The National Association of Insurance Commissions recommends payout ratios of 60 cents or more for most policies.

For debt cancellation and debt suspension contracts, “the payout is somewhere in the 1% to 3% range,” Birnbaum says.

The death benefits may now cover only accidental death, and the debt suspension is usually available only if the consumer stops using the credit card. “Who’s going to give up their card if they’re disabled and unemployed and lost their income?” Birnbaum says. “Once people ... realize they can’t use the card, they’re not going to take the so-called benefit” that they paid for.

Regular life and disability insurance policies are almost always much better deals. You also can protect yourself from employment-related setbacks by paying your cards down or, better yet, paying them off. Plus maintain an emergency fund equal to three to six months’ worth of your expenses.

The time-stamp on your payment
It’s not enough that you get your payment into the credit-card processing center by a certain date. Now it has to be received by a certain time, typically noon or 1 p.m. in the processing center’s time zone. If your payment’s in the late afternoon mail, you get slapped with a fee and possibly a higher interest rate. Some companies make things even more difficult by changing their payment addresses occasionally, ensuring that some payments will be late just because they had to be forwarded.

These fees generate a ton of money for credit-card companies. The average amount charged has tripled in the last decade, to $30, and credit-card lenders now get about one-third of their profits from various late fees, over-limit charges and other penalties.

The solution: Pay the bill as soon as it comes in, preferably at the card’s Web site or through on online bill payer. Such electronic transactions generate a traceable trail that can establish you made the payment on time. (If you’re using an online bill payer that cuts a check, rather than sending an electronic transaction, you’ll still need to check the credit-card company’s address each month and update your online biller as necessary.)

The 0% rates that aren’t
Lenders are getting somewhat more sophisticated about who gets their best offers -- those 0% rates that last for a year or more.

Several companies, including Fleet Bank, Citibank and Chase, recently rolled out such long-term no-interest deals, according to CardWatch.com. You may even have received one of these offers in the mail. But if your credit is less than perfect, or if you put a few dings in it by constantly opening new accounts to chase other great interest-rate deals, you might not be approved or you might get a card with less generous terms.

You’ll also need to check the fine print. You’ll typically pay a 3% balance transfer fee and the 0% rate will apply only to certain parts of your balance. The Chase and Citibank offers, for example, limit the 0% rate to balance transfers, while the Fleet deal applies only to new purchases.

And remember, all it takes is one late payment for that great rate to be replaced by a much higher one.

If you can qualify, try to make this transfer your last and pay off your debt before the rate expires. Carrying a balance just leaves you at the whim of credit-card companies.

As I’ve written before, the only way to win the interest-rate game is not to play it.

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