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Important Information for Credit Card Holders

Factors Every Credit Card User Should Know
Many experts say the profitability of the credit card industry began more than 25 years ago when the banking industry successfully eliminated a critical restriction: the limit on the interest rate a lender can charge a borrower.

Deregulation, coupled with a revolution in technology that enables the virtual real-time tracking of personal financial information and the emergence of nationwide banking, resulted in the widening availability of credit cards across the economic spectrum. But for some, credit costs much more than it appears.

Whether you're a college student considering your first credit card, or a seasoned veteran of the credit card game, consumers ought to consider the following points.

Universal Default: Even if you make your credit card payments on time, the credit card bank can raise your interest rate automatically if you're late on payments elsewhere -- such as on another credit card or on a phone, car, or house payment -- or simply because the bank feels you have taken on too much debt. This practice is called the "universal default" clause and increasingly is becoming a standard clause in credit card agreements. Credit card executives maintain that the logic behind universal default is that the bank is not being unreasonable in raising rates when it has reason to believe that the risk of being repaid by the customer has increased.

FICO Score: Your credit score -- known as a FICO score -- has become a vital statistic for many Americans and can be widely shared. It is used to determine how much you can borrow, how much you pay for life insurance, if you can rent a home, and, as already noted, it can be a factor in determining the interest rate you pay on a credit card. Most Americans don't know what their credit score is, nor how it's computed and with whom it's shared. Your credit score is usually determined by five factors, with the most important being the amount you currently owe and your payment history on large debts.

Late fees: In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted the existing restrictions on late penalty fees. Back then, fees ran to $5 or $10, and usually did not exceed $15. After the Court's decision, fees soared, reaching upwards of $30. Since then, the amount of revenue the companies generate from fees (including late charges, over-the-limit fees, and charges for returned checks) has doubled.

Monthly minimums: Many Americans are inattentive about their credit card accounts. Approximately 35 million Americans pay only the required minimum -- as low as 2 percent -- of their balance each month. Sticking to that rate, it could take years to clear their debt and they'll end up paying far more than the cost of the items or services they purchased.

Predatory Lenders: There is no federal limit on the interest rate a credit card company can charge. If you've ever looked at the return address on your statement, you may notice your credit card issuer is located in a state such as South Dakota or Delaware. That's because these are the states that have either weak or no "usury laws" meaning there is no cap on the interest rate that is charged. The federal government once had national usury laws that set a cap on the amount of interest that could be charged on a loan. However, the federal government repealed these protections and some states put no new usury laws in place. That's why Citibank, the issuer of Mastercard, moved to South Dakota, which has no cap on interest rates.

Senator Chris Dodd has introduced several bills to curb credit card industry practices. Dodd says that the credit card industry "has become very, very powerful. And it's very successful in defeating every legislative attempt that's been made over the last several years to inject some responsibility on the part of this industry.

Read the fine print: It's important to read the fine print on your credit card agreements. Buried in the legalese that people so often ignore is a provision that allows the company to change your interest rate, at any time, for any reason, provided they give you 15 days notice.