Credit Card Penalties and How to Avoid Them

By: Chris Cooper

For the well organized borrower, credit card penalties might be a subject of little interest. However most of us get hit from time to time with one or another of the multitude of penalties credit card issuers can levy.

There is a reason for this. The credit card companies rake in a lot of extra income by invoking these penalties. If it seems that they are becoming more common, it is because they are, with the lenders tinkering with the rules frequently to try catching you in their trap.

The main credit card penalty that seems to hit everyone from time to time is the late fee.

One of the lenders' games has been to change the address the payment is to be mailed to periodically, hoping the customers won't notice. For example, you live in New York and your check was mailed to a processing center in New Jersey.

Suddenly the processing center is moved to Arizona. You think 3 or 4 days is more than enough time for your payment to arrive on time, but now it might actually require 5 to 7 days for the mail to arrive at the processing center. Throw in the fact that grace periods are growing shorter all the time and your payment is more likely to be late.

There used to be a time when the banks would cut you a little slack. If your credit card bill was due the 15th and the check arrived the 16th or 17th, nothing would happen. Now, even if your check arrives before the next billing cycle date, the bank will consider it late if it doesn't meet their sometimes arbitrary due date.

And worse than that, banks now will consider a check that arrives on the due date a late payment if it comes in past a certain time, say noon.

Late charges are now about $39 for everyone. If you aren't late too often, a bank will sometimes reverse the charge if you call and ask. It's certainly worth the effort.

Other credit card penalties are those charged for going over your credit limit and for bouncing cash advance checks. Depending on the bank these can be quite high, $75 or more.

Of course if your payment check bounces, you're in for a real treat. First the credit card company will consider your payment late and hit you, at a minimum, with the late fee. They might also throw in a bounced check charge for good measure.

Then your own bank will get into the act and charge you for writing a bad check - all in all, not a pleasant or inexpensive experience.

Another surprise, although not considered a penalty by the bank, is the two cycle billing trick. If you've been carrying a balance and then pay the entire bill off, you will get yet another bill for unpaid interest.

Some banks calculate your interest charges over two billing periods, so when you pay the bill in full, there is still money owing. The only way to get around this is to prepay an extra month's interest, but that really gains you nothing.

Not all banks do this, so find and use the ones that don't.

And the worst penalty of all is if the universal default clause is activated. Usually this happens when you are late paying other creditors or go over their credit limit. It can also be invoked when your credit score drops because of excessive use of credit, even if you've never been late with a payment to anybody. Other triggers are not paying utility bills, parking tickets or even library fines on time.

This usually means you will, from that point on, be charged the penalty interest rate, usually the highest rate the bank charges and commonly around 29.99%.

If this happens call the bank and tell them you're taking your business elsewhere. Sometimes they'll lower the rate. Otherwise start shopping around for a cheaper card and close the other account as quickly as you can.

I am sure there are other esoteric charges the bank can hit you with, but these are the main ones to look out for.

One way to avoid a lot of these penalties is to use a financial software program like Microsoft Money or Quicken. With both these programs, you can download your transactions from your creditors, your own checking account and your investment accounts.

You can keep on top of your credit card and checking account balances that way. This is the only sure way to avoid being overdrawn, going over your credit limit or making your payments late.

These programs also offer online billing paying, but at a price.

If you're willing to spend a little time, you can sign up for online access for just about all your accounts. You can then visit the website for every credit card company you have an account with to see what your balance is; what charges are pending; and pay your bill online, all without cost.

Watch the small print if you use a credit card company's web site. Some banks are now charging fees, as much as $29, if you try to make your payment online and have it credited on the day it is due.

Plan ahead and pay a day or two early.

Or you can open a checking account, money market or brokerage account that offers free online bill paying. These accounts are usually free if you meet certain minimum balances or have your paycheck directly deposited into the account.

Online bill paying is very helpful in avoiding late fees, because you can schedule the exact date the payment will be made - you can even set up recurring payments to be made automatically. But even with this service, make your payment a day or two before the due date to avoid problems. And it is important to make sure you have enough money in your account to cover these payments, especially those that might be scheduled months in advance.

With a little attention to detail, you should be able to avoid credit card penalties permanently.

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