APRIL 2004

Penalty Fees on Credit Cards

Your odds of paying a penalty fee on your credit card are going up, as are the size of the fees themselves. The Wall Street Journal reported that competition among card issuers on interest rates is increasing the pressure to generate revenue from other sources. Consequently, interest-free grace periods on monthly billing cycles have declined to an average 20.6 days from 27.8 days a decade ago. Most major issuers are raising their late payment and overlimit fees as well. MBNA charges late and over-limit fees of up to $39; Citibank and Bank One charge up to $35; American Express is due to raise its overlimit fee in May to $35, and the fee for bounced checks to $38. Credit card expert R.K. Hammer told the Wall Street Journal that income from late fees and other penalty fees will total $13 billion this year, and account for as much as 39% of credit-card income. This is sharply higher than the 28% of all credit card income contributed by fees as recently as 2000. With these figures in mind it is easy to accept the advice of Greg McBride, a senior analyst at Bankrate.com. He told the Wall Street Journal that customers should be mindful of their credit limits: "You can’t assume any purchase that puts you over the limit would be denied. There’s much more profit for issuers in approving the purchase and assessing the over-the-limit fee than in denying the purchase."