When Alice Beasley got hit with several credit card late fees in 1986, she got mad. She was already paying more than 20% interest on her card balance with Wells Fargo Bank. The late fees, imposed despite the fact that her payments were never more than a few days tardy, made her feel overcharged and ripped off.
An attorney herself, Beasley took her complaint to a San Francisco lawyer with a history of fighting charges levied by big banks.
Eight years later, Beasley and a conglomeration of other Wells Fargo customers won their class-action case. Wells Fargo refunded $5.2 million to current and former customers. Possibly more significantly, the case helped keep late fees charged by California's major banks among the lowest in the country--generally between $3 and $5.
But the Beasley victory, won only last year, may be fleeting, thanks to a recent U.S. Supreme Court decision.
Any state that limits late fees by case law or statute--and there are now 31 states that do, including California--could find these limitations subverted because of the Supreme Court's decision Jan. 11.
In a nutshell, the Supreme Court accepted a lower-court ruling that allowed out-of-state banks to "export" their fees and charges into states that normally prohibit or limit them. The decision does not directly deal with charges by in-state banks. But it leaves the door open for these banks to reincorporate in states that have no such limitations and bring their fees with them.
That means that consumers who have never before had to worry about exorbitant "penalty fees" must now be wary, says Gerri Detweiler, executive director of Bankcard Holders of America in Herndon, Va.
"This is a green light for issuers to go ahead and charge fees across the board," Detweiler adds.
The penalty fees can be significant. A recent study of 25 big credit card issuers found charges ranging from $10 to $20 for each late payment, according to Consumer Action, a San Francisco-based consumer group. In other words, just one such charge can wipe out the benefit of opting for a card with no annual fee.
In 1991, U.S. banks collected more than $1.1 billion in late and over-limit fees, Detweiler says. (Over-limit fees are charged when you exceed your borrowing limit.) Although 1992 figures are not yet available, they're sure to be higher, since banks are increasingly looking to such fees to increase company profit, she adds.
Thirty-one states--including California, Massachusetts, Indiana, Kentucky, North Carolina, Oregon, Pennsylvania, Washington and Wisconsin--limit or prohibit credit card late fees. However, the bulk of the nation's biggest credit card issuers are headquartered in states that have no such limitations, such as Delaware.
What makes these fees particularly onerous to consumers is that they're insidious. Banks clearly advertise their interest rates and annual membership fees--particularly when these rates are low. But penalty charges are disclosed only with the finer details on credit card contracts.
As a result, even the savviest consumers--those who actively shop for low-rate, no-fee cards--are often unaware of the charges until it's too late, says James C. Sturdevant, the San Francisco attorney who handled Beasley's case.
"When you're applying for a card, you just don't view yourself as a person who would exceed your credit limit or pay late," he says. "These fees don't show up until you're well into the game."
Still, you can limit your chances of getting hit with these fees by becoming a bit more savvy about terms and conditions of your credit card accounts, consumer advocates say.
When you're solicited to buy a card, particularly if the solicitation comes from an out-of-state bank, be sure to read the whole agreement, says Ken McEldowney, executive director of Consumer Action. Banks will generally disclose penalty fees somewhere in the solicitation, although rarely as prominently as interest rates and annual fees.
In addition to interest rates and annual fees, there are several items you should pay particular attention to. Specifically: grace periods--the time you have to pay before interest rates are assessed; cash advance interest rates and fees, which are frequently higher than the rates on ordinary credit card charges; late fees; over-limit fees, and how the average balance--upon which the interest is calculated--is determined. Some methods for determining the average daily balance actually take two months' worth of charges into account, making the cards far more expensive than they seem at first brush.
Finally, if you do get hit with a late or over-limit fee, challenge it, Detweiler says. Many banks will waive these fees--particularly over-limit fees--for good customers.