How to avoid credit card fees
John F. Wasik is a Reuters columnist and author of The Audacity of Help. The opinions expressed are his own.
Gearing up for those back-to-school, pre-Labor Day sales? The first thing you need in hand isn’t a shopping list, it’s a sound personal credit policy.
If you plan how to use credit before you hit the stores, you’ll save yourself a lot of money when the bills come due, Should you pay your bills in full every month, you’ll not only avoid finance charges, your credit will effectively be free for that month net of membership and other fees.
What if you don’t pay the balance in full? Don’t allow banks to “pad” your bills with late fees. New Federal Reserve Rules that go into effect August 22 give you some protection, but you still need to be vigilant. The Fed’s new rules cap some of the more obnoxious credit-card fees. Here’s how they work:
• Credit card issuers can’t charge a penalty of more than $25 for late payers or violating the account’s terms.
• You can’t be charged a late fee that exceeds the dollar amount associated with the violation. Card issuers, for example, can no longer charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20.
• Not using the card? The new rules ban “inactivity” fees.
• Banks can’t layer on the fees. Multiple penalty fees based on a single late payment or other violation are illegal.
If you think that the Fed is eliminating all late fees, you’re wrong. The Fed makes an exception to all of the penalties if you have “engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations.”
Translated from bankerese, if you’re a serial abuser of your credit limits and payment deadlines, you don’t get a break. Banks will still nail you with late fees.
Even if you get hit with a surcharge, you may not have to pay it. Whenever the mail is slow and my statement is a tad late, I call my credit card company and tell them to remove the fees. Since they know that I’ve been a prompt-paying customer for 17 years, they don’t charge me. Credit-card issuers know good customers can switch in a heartbeat – and will.
The new Fed rules stem from a federal credit card law that passed in May of last year. Also included in the legislation are warnings that if your credit terms are changing, you will receive a 45-day written notice before they do.
What neither Congress nor the Fed decided to curb was the finance charges themselves. Banks are still free to raise them as high as they like.
Washington also left alone the troubling problem of debt settlement companies. You’ve probably seen their ads on cable TV. They offer to consolidate and settle your debts for less than what is owed.
Debt settlement fees can be exorbitant – ranging from 14 percent to 18 percent of total debt. That’s outrageous since the average actively managed stock mutual fund will only charge you about 1 percent annually to manage your money.
For debts ranging from $20,000 to $30,000, reports the Consumer Federation of America, these debt settlement firms may charge you from $2,800 to $5,400. That’s in addition to what you owe to your creditors.
Are debt settlement firms worth it? A recent Government Accountability Office survey found their claims of success to be “suspiciously high.” It’s unrealistic to believe that a third-party can eliminate all of your debts. Many creditors will take you to court to get their money.
Several pieces of legislation are being considered in Congress to police debt-settlement abuses. In the interim, the best way to avoid these firms is to ensure that you don’t get swept away by the coming sales. You’ll save nothing if you pay more to your credit card company than what you saved at the cash register.