Top5 Credit Card Costs To Avoid

By Aleksandra Todorova,
Reporter, SmartMoney.com

IT'S NO SECRET THAT credit cards are laden with traps. Just combine a few big-item purchases with a high interest rate, add in some unexpected fees and make only the minimum payment -- you've got a recipe for debt disaster. American households now carry an average $9,660 in credit-card debt, according to industry Web site Cardweb.com.

That said, some credit cards are simply more treacherous than others: They come with lower credit limits, hike your rate for little or no reason and slam you with unexpected fees.

Here are five credit card features to avoid and some of the credit cards that use them.

1. Penalty Rates

The average credit card interest rate may be less than 14 percent, but many folks today pay well above 30 percent. Blame it on a practice called "penalty pricing," which allows credit-card companies to hike your rate if you are late on a payment, go over your credit limit or send a check that bounces. Penalty rates average 24.51 percent, according to the 2007 Credit Card Survey by advocacy group Consumer Action, but can be as high as 32.24 percent.

"Hiking your rate to 30 percent because you are late on a payment -- or maybe the post office was late -- could end up costing you a huge amount of money," says Ruth Susswein, a Consumer Action spokeswoman.

Can you protect yourself? Make sure you know what triggers your card's penalty rate, says Curtis Arnold, founder of credit card Web site Cardratings.com. Some banks will hike your interest if your payment is as little as a day late, others will wait until your second late payment within a six- or 12-month period. For example, many Chase cards warn of APR increases if your payment is not received by "the date and time due," according to Cardratings.com, including its Chase Home Improvement Rewards, PerfectCard, Flexible Rewards and Sony cards. Meanwhile, its AARP Rewards and Disney Rewards cards don't kick in penalty pricing unless you have two late payments within a six-month period.

To find a card with a cheaper rate, click here.

2. Annual Fees

With very few exceptions, there's simply no need to pay an annual fee for a credit card. In many cases, you can find a card with equal benefits for free.

Take, for example, the popular American Express Rewards Green Card. Do you really need to fork over $95 a year when you could enroll in the company's Membership Rewards program for free with its Blue card? The only notable difference between the two is that with AmEx Green you can convert your membership rewards points directly into an airline's frequent-flier points, while with AmEx Blue you can't. (Click here for more reasons why the green AmEx may not be worth the annual fee.)

There are exceptions to that rule, of course. Some cards offer rewards that far exceed the annual fee. The American Express Platinum card, for example, may cost you a whopping $395 a year, but offers free access to airport clubs worth more than $300. You also get free companion tickets whenever you buy international business or first class tickets for yourself. Frequent travelers could recoup that fee before they know it. For more cards that may be worth the annual fee, click here.

3. Low Credit Limits

A low credit limit may not sound like a hazard. But it can easily sink you in debt and ruin your credit, to boot. How? If you exceed your limit, you'll likely get an immediate rate hike as your card issuer hits you with its penalty interest rate. In addition to that, credit limits play a big role in your credit health, as your debt load -- namely the ratio of your balance to your limit -- determines 30 percent of your score.

It's ironic, then, that credit cards claiming to help you build or improve your credit come with limits as low as $70. It's not a typo. The Tribute card, issued by First Bank of Delaware, is a subprime card that targets folks with poor or no credit history. It offers two kinds of accounts, depending on your credit: One has a $70 limit, the other, $300. What little credit line you have is eaten up by steep fees. The $70 card has a $19 monthly maintenance fee; the $300 card has a $150 annual fee in addition to the $6 monthly maintenance fee.

If you are looking to rebuild your credit, avoid such subprime cards. Instead, consider getting what is called a secured credit card: This is a credit card backed by a security deposit you leave with the card issuer for as long as you have the account. How much you deposit -- i.e. your credit limit -- is up to you. Some banks allow as much as $10,000.

4. Credit Limit Increase Fees

Credit-card issuers never tire of inventing new fees. The latest: credit-limit increase fees. That's a common trick among subprime cards. The Continental Finance MasterCard, for example, will periodically increase your credit limit by $100 if you pay your bills on time. But it will also charge you a $25 fee for each increase, unless you opt out of such increases altogether.

Recently, the fee made it into the world of prime cards, as well: If you are approved for a credit limit increase for your BestBuy Reward Zone MasterCard, HSBC -- the card issuer -- could charge you a credit limit increase fee as high as 50 percent of the increase amount. Whether you are charged that fee depends on your creditworthiness, so you won't even know if there's a fee until you apply for the increase, explains CardRatings.com's Arnold. By press time, Best Buy hadn't returned our calls seeking clarification.

5. Internet or Phone-Payment Fees

Many consumers have gotten used to paying their credit cards online these days. And why not: It's fast, easy, convenient, and helps avoid delays by the post office.

It's also free. That is, unless you have to make a last-minute payment, when many credit-card companies will charge you $15 or more. That is, essentially, charging you a fee for the privilege of paying your bill on time, says Susswein. Chase charges $14.95 for an expedited online payment; HSBC, $15; and Everbank, $29. In addition to that, many banks will charge you a fee for paying by phone, regardless of how far you are from your due date. Consumer Action found that 13 of the 20 banks it surveyed charged such fees, ranging from $3 (Amalgamated Bank of Chicago) to $14.95 (HSBC, Citi, Washington Mutual). If you're planning to use these services, be sure to ask your credit-card companies how much it will cost you -- or avoid their products altogether.

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