The Checkout

Designed to Confuse

Credit card companies don't talk down to you. Instead, they assume you can read at a 10th to 12th grade level or higher. But don't take it as a compliment.

A Government Accounting Office study released yesterday listed the required reading level of credit card agreements as one of several ways in which the top six credit card issuers leave consumers in the dark about practices such as charging interest based on debt that has been paid off and punishing consumers for late payments with penalties of as much as $39 and higher interest rates.

The study looked at credit card solicitations and agreements for the 28 most popular cards issued by the six largest credit card issues, as of December 31, 2004: Citibank, Chase Bank USA, Bank of America, MBNA America (which is now part of Bank of America), Capital One Bank and Discovery Financial Services.

In addition to being written well above the recommended 8th grade reading level, credit card solicitations and agreements were poorly organized and buried consumers in overly complicated text.

In the industry's defense, the report said outdated federal regulations about disclosures were partly to blame. The Federal Reserve is reviewing regulations about credit card disclosures. Don't be shy about letting them know what you think.

There were plenty of other interesting tidbits in the report:

* Eighty percent of cardholders have cards with interest rates less than 20 percent. Almost half of cardholders paid little or no interest because they paid their balance in full. Thirty-five percent of cardholders were hit with late fees and 13 percent faced fees for going over their credit limits.

* Credit card late fees rose from an average of $12.83 in 1995 to $33.64 in 2005, a rise of more than 160 percent.

* Some of the credit card companies told GAO they had backed off "universal default," which is punishing consumers with a higher interest rate if they make a late payment on another, unrelated credit card. Four of the six companies said they still do jack up rates but they now give cardholders some notice before doing so.

* Laws in states where four of the companies are chartered require them to allow consumers to opt out of a change in interest rate. But consumers rarely take advantage of this option, possibly because companies make it hard for them to do so by, for example, making them pay off their balances in full.

* The most expensive debt on your credit card has a way of sticking around. Credit card issuers decide how much of your monthly payment to allocate to different balances, which carry different interest rates. For example, cash advances have different rates than regular purchases. For 23 of the 28 cards looked at, the companies allocate first to the balance with the lowest rate, which means the balance with the highest rate hangs around the longest.

* Two of the six issuers said they charged interest on debt that was paid off, a practice known as "double-cycle billing."

At more than 100 pages, the GAO report isn't exactly easy reading either. And it doesn't out the companies that are guilty of the most egregious practices. But it's worth dipping into for information you won't get from your card issuer, or at least not in plain English.

GAO wouldn't tell us which companies do what. But you can. Fill in the gaps for us here.

By Annys Shin |  October 12, 2006; 9:00 AM ET Credit Issues
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Comments

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double cycle billing? charging interest on paid off debt? What is this?

Posted by: jane | October 12, 2006 9:29 AM

The really annoying thin is if you're trying to dispute a charge on a card, or a cable bill for instance, and you do not pay it because it would be caving in to their corruption and stealing... then your other unrelated cards interest rates go up, really doing a number on you. The worst experience I had was when I went TDY (temporary duty) for 6 weeks when I was in the military. I missed my government charge card payment because I had not been reimbursed for government expenses yet because the finance office made a mistake. Well, as I did not have the money to make the payment on behalf of uncle sam, MY personal cards interest rates shot up. It took me 2 years to recover from that mess and get interest rates down to managable levels. There is no fighting these Goliaths when they almost conspire against you!

Posted by: Chris | October 12, 2006 9:37 AM

I agree, the post was very vague on this point. How does that work?? is this not illegal?

Posted by: charging interest on paid off debt? | October 12, 2006 9:41 AM

As the number of credit card issuers boil down to a "precious" few, so does the leverage which consumers have when dealing with real time injustices. No one does not need to use credit cards, but yes one who uses must have the terms of the deal succinctly and accurately explained to them in plain English. This is not done and the Government could assist in getting it done.

Posted by: PT Barnum | October 12, 2006 9:56 AM

The monthly 'minimum amount due' is most likely the finance charge. The balance stays untouched if you pay only the minimum amount due. One time I bit the bullet and paid off the entire balance due on a credit card and got a bill the following month for the $149 finance charge. I don't recall which card that was, but I recall I cut it in half and never used it again. I also have an issue with the due dates. When I get a bill, the due date is only within 2 weeks of receipt of the bill. We get paid twice a month, so many times the due date is before a pay date.

Posted by: Southern Maryland | October 12, 2006 10:24 AM

I am almost positive that Discover does the double cycle billing - only because my sister told me so when I got the card - that's it's the worst on to have because of this. So, not 100% sure, but possible. I ended up cancelling the card when the interest rate shot up from 11% to 28% in one month's time - no reason - had not been late, over limit, etc. Then they called wanting me to come back, um no.

Other question - how is it legal to charge 30% interest - what is the highest rate that can be charged - I remember 10 years ago when if it was near 20% it was high - 30% that's just crazy!

Posted by: Betty | October 12, 2006 11:03 AM

"We get paid twice a month, so many times the due date is before a pay date."

Maybe you should cut down on using the card? Sounds like poor budgeting.

Posted by: Wondering | October 12, 2006 11:05 AM

Any chance of just requiring the credit card companies to follow the suggestions of the Plain English movement?

http://www.plainlanguage.gov/

http://en.wikipedia.org/wiki/Plain_English

http://www.plainenglish.co.uk/

That would make life easier for all of us.

Posted by: cotopaxi | October 12, 2006 11:25 AM

An accompanying WP article on this report explains the interest-on-paid-amounts:

Half of the companies surveyed charge interest on debt consumers have already paid. For example, if a consumer charges $500 and pays off $450 before the billing cycle ends, these companies will charge monthly interest for the entire $500, not just the remaining $50.

Posted by: KJS | October 12, 2006 11:38 AM

I know that Chase does the "double cycle billing" whatever that is. I completely paid off the balance on my husband's credit card, by the due date, and was still hit with finance charges on the next bill, even though it was a zero balance otherwise (i.e., no new charges). I find Chase to be the most difficult credit card company to deal with. Their policies are confusing, their customer service reps are not helpful and often just rude, and their attempts to "get" you are so blatant as to be ridiculous. Needless to say, this card is gone.

Posted by: kebvc | October 12, 2006 12:02 PM

A lot of financial companies derive a good chunk of their profits from 'hidden' fees and the like.
The book 'Niche Envy' echoes some of the topics you mention.

Serge
Blog:
http://www.sergetheconcierge.com
Biz:
http://www.njconcierges.com

Posted by: Serge Lescouarnec | October 12, 2006 1:32 PM

What we as consumers need to do is to get used to not using credit cards at all. If a greater number of people abstain from credit card use that would put a dent in the credit card companies hefty profits and maybe we would see some changes. The Government clearly is not going to help us because we don't have a lobbist. I am reformed and now use my credit card to make reservations, but pay in cash/check when I arrive!

Posted by: badams | October 12, 2006 2:27 PM

If you have a good payment history, you can stand up to your credit card company and win.

I have a Citibank card I've had since I was in college. Two years ago, they messed with the billing due date, pushing it up a few days earlier. Oddly enough, this coincided with Christmas week, when we (like many other people) had our mail on hold and were on vacation. Nice.

I got my bill out promptly on my return, but when my next statement came (back to the normal due date), I had a $50 late fee.

I called and told them it was very simple: they would remove the late fee, or they were going to lose a customer who had paid on time and in full every month for over 15 years. They took it off immediately and blamed it on their new software. Whatever.

And people ask why I have "only" two credit cards.

Posted by: Chasmosaur | October 12, 2006 4:32 PM

Consumer choice is really limited by the constant consolidation in the banking industry. Years ago, I got a Giant Visa card, which was issued by Chevy Chase Bank and paid back points for use on groceries.

Apparently the program was too good, because Giant backed out of the deal. CCB sold the accounts, without benefits, to FirstUSA. FU then sends a sends a fine print notice of changes to your account. This includes increase in interest rate from 17.9% to 24.9%.

I cancelled the card, and continue to pay off at the lower interest rate. FU is then bought our by BankOne, BO is then bought out by Chase.

Thankfully, I'm paying it off this month!

Posted by: Falls Church, VA | October 12, 2006 5:19 PM

I have a Starbucks Duetto card, which I think is now managed by BankOne. I recently had a long conversation with customer service about some interest charges. It turns out that although you might think that you would only be charged interest on the balance remaining after your statement due date, this is not the case. In fact, as far as interest charges are concerned, the due date is only relevant if you pay the balance in full. Otherwise, your payment must be received before the end of the statement period (weeks before you receive a statement) in order to avoid paying interest.

For example, if I receive a statement with a $1000 balance, and I pay $999 by the due date, I will be charged interest for the total amount for the time period from the end of statement period (the end of the month), until the due date (about two weeks later). If I pay $1000 on the due date, I pay no interest.

I'm amazed that this kind of confusing, arbitrary rule is legal.

Posted by: tschm | October 12, 2006 6:59 PM

I have Citibank card on which I had made every payment in full for the entire 15 years that I had the card. I used this card for all my expenses, groceries, college tuition etc. and racked up the Traveler miles points. Suddenly one day Giant rejected my grocery purchase because I was "over" my credit limit. A call to Citibank revealed that they had dropped my limit from 25,000 to 5,000 without informing me, because of an "adverse report" on my credit report. A check of my credit report revealed a mistake on the part of Bank of America on another card - that was quickly fixed.

I challenged the office of the president at Citibank to explain how they could treat a long standing customer with a stellar payment record in this manner. What, I asked, would have happened had I been traveling abroad with my Citi card and encountered this situation when paying a hotel bill?

I received apologies, the Citbank VP mumbled that this was their risk management approach for all their customers.

I pointed out that no other credit card company such as MBNA had taken such drastic action, and that Citibank was pushing me right into the arms of its competitors.

When the mistake was cleared up on my credit report, Citibank restored my line of credit, but did not drop the interest rate back to its old level ( not that it mattered since I pay in full).

Needless to say I am using a more dependable card company since then.

Posted by: Cardbuster | October 12, 2006 8:01 PM

I have a Citibank card on which I had made every payment in full for the entire 15 years that I had the card. I used this card for all my expenses, groceries, college tuition etc. and racked up the Traveler Miles points. Suddenly one day Giant rejected my grocery purchase because I was "over" my credit limit. A call to Citibank revealed that they had dropped my limit from 25,000 to 5,000 without informing me, because of an "adverse report" on my credit report. A check of my credit report revealed a mistake on the part of Bank of America on another card - that was quickly fixed.

I challenged the office of the president at Citibank to explain how they could treat a long standing customer with a stellar payment record in this manner. What, I asked, would have happened had I been traveling abroad with my Citi card and encountered this situation when paying a hotel bill?

I received apologies, the Citbank VP mumbled that this was their risk management approach for all their customers.

I pointed out that no other credit card company such as MBNA had taken such drastic action, and that Citibank was pushing me right into the arms of its competitors.

When the mistake was cleared up on my credit report, Citibank restored my line of credit, but did not drop the interest rate back to its old level ( not that it mattered since I pay in full).

Needless to say I am using a more dependable card company since then.

Posted by: Cardbuster | October 12, 2006 8:07 PM

"Two of the six issuers said they charged interest on debt that was paid off, a practice known as 'double-cycle billing.'"

The comments explain it somewhat, but an entire article on this pehnomenon would be interesting, because I don't fully understand the mechanics, and I'm betting I'm not alone.

Posted by: Anonymous | October 13, 2006 9:43 AM

Let me add MBNA as one to be tarred on the "double cycle billing". I paid off a signicant balance (which the statement stated was the "total balance due") Then the next statement came, and there was the $135.00 in pure profit (errr..I mean "finance charges") When I called to dispute this, the customer service agent agreed to reduce it by $65.00, leaving me with the remainder.

A quick review of the postings suggest that more than 2 card issuers participate in this form of theft. If they are willing do condone this type of practice, is it also possible that they aren't reporting it?

Posted by: Nearly debt free | October 13, 2006 3:41 PM

Chasmosaur and others who pay off each month - I'm not sure that the card companies care if they lose you as a customer. When you pay on time and in full each month, they aren't making money off of you. The other card holders (the ones that pay only the min amount due each month) are subsidizing your card. If there wasn't that subsidy, then I would bet that they don't even want your "business" since you really aren't adding to bottom line. Just a thought when if you have to "threaten" to move to a competitor - they may not put too much effort into retaining you. The effort is not for your "business," because there isn't any, it's really for the reputational "save face" so that you won't publicly trash then.

Posted by: alexandria | October 13, 2006 4:27 PM

Alexandria, I wanted to say the same thing. People who pay off their cards each month (which is certainly a good thing for them) are the worst kind of customers for a card company. The reason their charges were reversed was simply goodwill, since it was the first time it'd happened. Anyone can have that done for them.

Posted by: CNickyD | October 13, 2006 6:28 PM

Even if you do pay off your cc in full each month, the cc co. still makes money off of it each time you use it. The stores where you use it have to pay a fee each time one is used, 83 cents at last check. When you go to the grocery store and start to pay with a debit/cc card, the screen will ask FIRST if you want to use the debit option, because that doesn't cost extra, or so I have been told.

But the best way to use credit cards is for CONVENIENCE. Not to bolster your lifestyle. It should not be used as a short-term loan. The interest rates are too high. A personal loan will be a better deal, but the best bet before that would be a home-equity loan. We use a credit card often, but pay it off n full each month. Learn how to use Quicken. When I first started tracking my spending (a depressing task, I assure you), I was astounded at how much I spent on consumables. I began shopping much more carefully and was able to save tons of money in a few months. Not that I am rich, but I was spending everything I made pretty much.

Posted by: Not true! | October 13, 2006 7:40 PM

Not 83 cents per transaction. It depends--but between 20 and 40, I think, with other fees.

Posted by: Not true again | October 13, 2006 7:45 PM

http://www.nacsonline.com/NACS/default.htm

Wow--I googled 'credit card processing fees' and this was one of the hits. I looked through the site and one of the tidbits I found was that the cc co. can make more on a gallon of gas than the gas station owner. I think I want to start buying gas from Freestate (which takes cash only)! And the 20-40 cent transaction fee was pretty much best case senario.

Posted by: Anonymous | October 13, 2006 7:51 PM

Credit card companies are the only business allowed to raise the price of their product after the sale. If I bought a car and 6 months later the dealer called to require more money, I'd be on the phone to the BBB, Atty Gen, and a lawyer. There is no recourse against a credit card company. The "got you" factor is has increased exponentially. Chase Bank is among the most egregious, forcing me into a subprime equity loan to avoid losing my house over what was (before fees, interest on fees, etc.) a moderate debt.

Posted by: Natalie | October 13, 2006 9:37 PM

Its funny how cc charges never come up during election time issues. All the MBNA, Citibank, Chase stuff happens because Congressmen are paid to let it happen.
There is a painful (for us) disconnect between Congress and us.

Posted by: rfayhallock | October 16, 2006 10:02 AM

Ok, nobody under the age of 18 can get a credit card, so what is the problem here? By the age of 18 you are either a senior in high school or a recent graduate. You should be able to read and function mentally at that level.

Are you trying to tell me that we should:

1. Dumb down the entire country to the lowest denominator? or
2. Require (REQUIRE) parents to improve the education of their children to the level necessary to understand these documents?

Notice I said it is the parents responsibility to educate their child - the schools systems will assist, but it is the PARENTS job.

Posted by: had enuf | October 16, 2006 2:05 PM

I believe it was Discover that first started using double-cycle billing. In any case they use it now regularly. I would advise anyone to stay away from them. It is unbelievable to me that this is even legal.

It is imperative that when you get a credit card offer you read the "disclosure" page carefully. It is the only time you'll get it.

Posted by: Omaha100 | October 16, 2006 2:32 PM

From my understanding, double-cycle billing means the credit card company takes a snapshot of your daily balance over your last two cycles (roughly two months) adds them up, and divides by the number of days in both cycles. This gives them the average daily balance over two cycles. This means if you have a big balance forward from a previous cycle, and pay it off the next month, they have all of the days from the past month, plus the time in the current cycle before your payment posts, pushing your two-cycle average close to the amount of the big payment.

Posted by: Anonymous | October 16, 2006 5:08 PM

Chase definitely does the double cycle billing --- I have two cards with them, and I paid off the first one in full - as soon as I got the statement. Next month, I got a $6.98 financing charge. I called them and tried to dispute it, but it was sort of like arguing with your 5th grade teacher (only my 5th grade teacher was alot nicer).

If it wasn't for the fact that my other Chase card gets me tons of frequent flyer miles, I would have cancelled both cards. As it is, I've been shopping around and checking the FF programs for other cards (let me know if anyone has any recommendations)...

Posted by: damn the man | October 16, 2006 5:35 PM

There was a time when I had to carry a balance on some credit cards that were not easy to deal with. They had a history of processing payments slowly then charging late fees. To be sure thatI never missed a payment I set my bil paying service to pay the minimum due every two weeks. That way I had a legal record of payment and there was no way I would miss a payment.

I never had a problem with them.

"We get paid twice a month, so many times the due date is before a pay date."

Posted by: Gary Masters | October 17, 2006 4:27 PM

I'm late to comment on this, so don't know who will still read it, but the double-cycle billing works pretty much as someone explained above.

By taking the average of your balance for the last two cycles, a credit card company gets the opportunity to charge you even when you have no balance. Say you started with a balance of zero, charged $500 last month, and paid off $300 when your bill came. Now, say you don't use the card again. The following month, you'll have finance charges on the $200 you didn't pay off. Say those finance charges are $2.50, for a balance of $202.50. If you pay off the $202.50 balance, your balance is then zero, but because you carried a balance within the last two months, the card company can use that two-cycle average and charge you interest on the daily average, even though today's balance is zero, meaning you could be paying interest on an average $100 balance or whatever the average might be, even though your actual balance today is zero. It won't be until the following month when you pay your credit card bill off in full again that you break away from the finance charges.

You also have to remember that when you carry a balance, the statement that is mailed to you reflects your balance on the day the statement was mailed out. Finance charges still are accruing on that balance, so in order to get it completely paid off, you have to find your payoff balance--which you can do online or by calling your credit card company. And if you don't do this, you'll still have finance charges the following month even with one cycle billing.

All good reasons not to carry a balance. (Or not to carry a card with two-cycle billing.)

Justin McHenry
Research Director
IndexCreditCards.com
http://www.IndexCreditCards.com

Posted by: Justin McHenry | October 19, 2006 8:48 PM

Best Credit Bureau Company

Posted by: Credit Bureau | November 1, 2006 6:00 PM

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