By Liz Pulliam Weston
Parents spend the first several years of children's lives teaching them how to play fair. By the time we hit elementary school, most of us are pretty good at knowing what's just and what's not.
That sense of fair versus foul, though, tends to get tangled up in the world of credit cards. Some practices that seem egregious at first glance actually make sense when you understand their rationale. Other policies don't hold up so well to scrutiny, even though they're widely accepted in the industry.
What makes matters more complicated is that a few credit card issuers are bad to the bone. Some of the companies that have the most consumer-friendly practices in one area turn around and punish their customers unfairly in another.
After many years of covering this industry, fielding reader complaints, talking to the issuers and listening to consumer advocates, I've drawn up the following list of what I consider fair and foul play, plus what you can do about it.
Mystery interest rates
Fair play: charging different customers different interest rates or offering different terms, based on their credit histories.
Foul play: not telling folks upfront what interest rates or terms they'll get.
If you have a good credit history, you should get a good rate, not one that's been inflated to cover the risks of others who haven't been as responsible.
But no one should have to play Russian roulette when applying for a card. Though some issuers, including Citibank and Capital One, usually tell you in advance what rate you'll get if approved, others -- including Chase, Discover, American Express, HSBC and Bank of America -- typically only offer a range of possible rates. You might get a rate that's in the single digits or one that's over 20%.
"In the best of all worlds, you would fill out an application, be told what interest rate you are approved for, then be given the chance to OK that rate or decline the offer. It rarely works that way," said Justin McHenry, the research director for IndexCreditCards.com. "Oftentimes you won't even know what rate you've been approved for until the card shows up in the mail."
Many times the terms are variable as well. A card may offer 0% for "up to" a year, for example, but once you've applied, you may get the touted rate for as little as three months, said Jeffrey Weber of SmartCreditChoices.com.
Credit limits are almost never disclosed in advance, either. This can be a serious issue for people transferring balances because shifting debt from a high-limit card to a lower-limit card can damage their credit scores.
Your best move: Don't hang on to a card you don't want. Though closing cards can never help your FICO credit scores and may hurt them, the damage isn't likely to be as serious with a newly issued card as it might be with one you've held for many years.
But you shouldn't apply willy-nilly for cards, either, because each application can potentially ding your scores. Also, some lenders may look askance at a borrower who rapidly opens and closes accounts, McHenry said, thinking such customers will be unprofitable.
If you're looking for a lower rate, first contact your existing issuer and negotiate for one. Read "Get a better deal . . . with a threat" for tips. If you plan to apply for a new card, know your FICO scores so you have an idea of what interest rates you're likely to get. You can get a ballpark idea of your scores from MSN Money's credit score estimator; generally, folks with FICOs above 720 get the best credit card rates and terms.
Slanted reports
Fair play: reporting your missteps to credit bureaus.
Foul play: reporting half-truths.
The credit reporting system in the United States has some serious flaws. Creditors wield too much power, and it's too hard for consumers to fix mistakes.
But overall, the system has succeeded in making credit more widely available, which is a boon to savvy consumers. If you get credit and use it responsibly, you can build a credit history that allows you to get the loans you need to buy a home, build a business or accomplish other goals.
What irks me, though, are lenders that deliberately make their customers look like worse credit risks than they are. Some of the worst offenders are issuers that don't report their customers' on-time payment records at all. Next on the list are those that don't report their customers' credit limits, like Capital One.
When a lender doesn't report a customer's credit limit, the bureaus typically use the "highest balance charged" as a proxy for the limit. The problem comes when borrowers charge about the same amount each month.
Here's how it works: If you use $300 of a $1,000 limit that's properly reported, the all-important credit-scoring formulas figure your "credit utilization" at 30%, and that's good. If your limit isn't reported and the highest balance you ever had was $300, it looks like you're using 100% of your available credit -- and that's bad.
It makes sense not to report a credit limit when a card has no preset spending limit, as is the case with many American Express cards. But folks that have those types of cards tend to have pretty good credit to begin with, so the lack of an accurate credit limit on one account isn't likely to hurt much. The people who really get crunched are the people with short or troubled credit histories who are trying to do things right but are unknowingly being penalized by their credit issuers' practices.
Your best moves: If your issuer isn't properly listing your credit limits, you can request that they do so. If your issuer is Capital One, though, you're out of luck. You can either charge up a big balance to reset your "highest balance charged" or switch to another card issuer.
Soaring rates
Fair play: raising your interest rate if you miss a payment.
Foul play: jacking up your rate if you're a few days late.
Late payments can happen to virtually anyone. Payments get delayed in the mail; online bill-payment systems experience glitches; issuers change addresses and payments go awry. Or people just goof.
Goofing to the point of forgetting a payment altogether, though, is rarer. A skipped payment is thus a better indication that someone is having money trouble.
The credit card companies know there's a big difference between late and skipped payments. That's among the reasons payments that are less than 30 days overdue typically aren't reported to the credit bureaus. But many issuers will still take advantage of your mistake by sending your rate skyward, even if your payment arrived only hours (not even days) late.
Your best moves: Don't carry credit card balances. Card issuers have far fewer ways to mess with you when you pay your balance in full every month.
Otherwise, reduce the likelihood of late payments by setting up recurring payments in your online bill-payment system or by agreeing to an automatic debit so at least the minimum payment is withdrawn from your checking account each month. If you use any method other than automatic debit, you'll need to check the credit card issuer's mailing address each month to make sure it hasn't changed.
If you do get dinged with a late fee, or a fee plus a higher rate, talk to your credit card company. Many issuers will waive late fees for good customers. Fewer will rescind the interest rate hike, but you can always try. Some will restore your original rate after 6 months of on-time payments.
Big fees
Fair play: charging late, over-limit and balance transfer fees.
Foul play: charging outrageous late, over-limit and balance transfer fees.
Until the mid-1990s, the typical penalty fee was about $10. Last year, the average late fee was $35, according to IndexCreditCards.com, and many companies charged $39. The average over-limit fee was a hair more than $32.
Some issuers also removed limits on the balance transfer fees they charge. In the past, the typical balance-transfer fee was 3% with a cap of around $75. Today some cards issued by Chase, Bank of America and others have no cap, which means a $5,000 transfer could cost you $150.
It makes sense to charge borrowers something for handling a balance transfer, just as it's justifiable to subject them to some kind of penalty for paying late or going over the limit. It's the amount that's being charged that makes no sense. These fees bear little relation to the costs or risks involved.
Your best moves: Clearly, you want to avoid late and over-limit fees whenever possible. Set up automatic payments so at least your minimum balance gets paid every month. Track your balances -- which you can do online, via phone, by using personal-finance software like Microsoft Money or Quicken, or simply by writing down your purchases and keeping a running tally. (Microsoft is the publisher of MSN Money.) You'll do your credit scores a favor by keeping balances to no more than 30% of your limits.
If you do get dinged, ask your issuer to waive the fee.
Before you transfer a balance, read the fine print and calculate all of the fees you're likely to face. Compare offers using sites such as CardRatings.com, Bankrate.com or IndexCards.com. With a little research, you can often get a better deal. Then use your low rate to help you pay off your balance; don't keep shifting it around.
A whole deck of cards
Fair play: issuing cards with low credit limits to riskier borrowers.
Foul play: issuing multiple cards with low limits to risky borrowers.
Credit card companies wisely limit their risks with certain customers by issuing cards with low limits, say $200 to $500. You're most likely to get one of these cards if your credit history is short or troubled.
As you show you can responsibly use the credit -- by paying your bills on time and not maxing out your card -- a typical issuer will reward you by raising your limit. If you miss payments or go over your limit, though, you don't typically get more credit.
An exception is Capital One. BusinessWeek recently revealed the card company's practice of simply issuing additional low-limit cards to the same customers. The big downside for borrowers is that they have more due dates and limits to track. The practice increases the chances a cardholder will mess up and incur late or over-limit fees.
Capital One has helped a lot of folks rebuild their credit after bankruptcy and other financial missteps. But it needs to drop the practice of issuing multiple low-limit cards.
Your best move: Don't max out your credit cards or charge more than you can pay off in full every month. Instead of accepting a new card, ask for a higher credit limit on the one you have.
Paying twice
Fair play: charging interest on balance transfers.
Foul play: charging interest before the check clears.
This one may be a little tricky to understand, so bear with me.
When you're approved to transfer a credit card balance, the company that's receiving your balance sends a payment to the company that currently has your debt. This payment may be electronic or may be a check.
The issue revolves around when your new credit card company begins charging interest on the balance transfer. Some start doing so long before the balance is actually switched, which means you could wind up paying interest to two companies on the same debt for a week or even longer.
Curtis Arnold of CardRatings.com polled six major issuers -- American Express, Bank of America, Capital One, Chase, Citibank and Wells Fargo -- and found that all begin charging interest as soon as they initiate an electronic transfer to the card issuer holding your balance. That's OK in my book because electronic transfers tend to happen quickly, and the overlap period where you're paying interest twice is usually a day or two, at most.
If the issuer sends a check, though, policies vary. Bank of America, Citibank and Wells Fargo wait for the check to clear before starting to charge interest, Arnold said. American Express, Capital One and Chase begin to levy finance charges as soon as they cut the check. If it takes a while for the receiving bank to get and deposit the payment, you're the one who pays.
Your best moves: Is this a huge deal for a consumer? Probably not. Even with big transfers -- say, $10,000 or more -- we're still talking about only a few bucks a day and a total cost that's less than most late fees. But it's annoying nonetheless. Clearly, you want to try to press for an electronic transfer whenever possible.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money.
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