Credit Card Fees

Dear Gary,
About a month ago, I got a letter from my credit card company, Capital One, telling me that they have selected to give me a (temporarily) lower interest rate and are giving me a $20 annual fee. Before, I had no annual fee. I pay my bill in full every month to avoid paying any interest. Therefore, the "generous" offer of a lower interest rate did not apply to me at all. I read the fine print, and it said they were changing the terms of my account because of "insufficient activity." We charge plenty every month, but we pay it off in full. This letter was a sneaky way of telling us that they will punish us for paying our bill off every month.

From what I've read in the news, this is becoming common practice. Do you have any suggestions about dealing with this situation? Are any credit card companies out there who actually appreciate when their customers aren't on the brink of bankruptcy?

What I've done: I called Capital One first to see if they'd deal with me. They said that I wouldn't be charged the $20 until April, and we could negotiate then. Of course, if they refused to negotiate then, I wouldn't have any other credit card to go back to, and I would be stuck. So I've applied to a credit card from a credit union in the local area and am awaiting their response. If they accept me, I will drop Capital One.

I would convert to a check card--a card that looks like a credit card but acts like a check--if my bank offered them. It's a small local bank, and I don't want to go through the bother of changing banks.)
-- Sara

Sara is confronting an issue that we'll all face in the next few years. Credit card companies are beginning to admit that they like to lend us money (at crazy rates, of course!) They also are making an effort to reduce the number of cardholders who pay their bills in full each month. But, don't worry. All is not lost!

The first thing you should do when faced with this situation is what Sara did. Contact the credit card company and ask them to waive the fee. Sometimes they will and sometimes they won't. This is one time when having an excellent payment history isn't going to help.

If the credit card issuer refuses to drop the fee, your next step is to find another credit card without a fee that will give you the credit limit you need. If getting a high enough credit limit is a problem you can get two new cards or review your spending habits!

There are banks that offer no fee cards. A quick search on "credit cards + no fee" in a search engine brought up twenty six banks with current offers. Ten of those were said to be willing to accept accounts from anywhere in the U.S. You might not even have to search them out. I get offers every week in my junk mail. Every so often there's one for a no fee card.

You might want to think twice before changing to a check card. Remember what's happening here. If you pay your bill in full each month you've actually received a free loan from the credit card company. It's only for a couple of weeks, but never-the-less it's still a free loan. (Don't worry about the credit card company. They make up for it by charging the store 1% or more on each transaction.)

But if you go to a check card, your account will be charged as soon as the bill clears. It works almost as if you wrote a check for your purchase. You'll lose that short free loan you've been getting. However, if you only make small or occasional purchases a check card could be fine for you.

One recent event means that we'll all need to be more aware of credit card fees. This past summer the U.S. Supreme Court ruled that companies can base their fees on the state where the company is located rather than the customer's location. Most companies are located in South Dakota and Delaware. You can guess why. That's were the laws are least restrictive on fees.

Some experts are predicting a surge in the kinds of fees and the amounts charged. You'll probably start seeing fees for cash advances, calling to ask your account balance and even for not using your card enough. The best strategy is go shop around. There are over 6,000 companies that issue credit cards. Find out about some of them.

Just like in most everything else, credit cards are getting more complicated. You need to know more to make a good decision. But the good side is that there are plenty of options available to you. With a little research you should be able to find a credit card that does a good job of meeting your individual needs.

Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.

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