Next time you get a credit-card bill, take a look at the interest rate charged on your unpaid balances. I'll wager it's higher than you thought.
You may even be paying "penalty rates" that have recently topped 30 percent.
Interest rates on most credit cards have been going up. They're usually pegged to the bank prime lending rate, which is the benchmark for pricing loans. The prime rate has risen to 9.5 percent, up 1.75 percentage points in the past 19 months. Your credit cards probably charge the prime rate plus a fixed premium -- for example, prime plus 8 percent. Combining the two would give you a credit-card rate of 17.5 percent today.
Many banks change their credit-card rates quarterly. The prime rose 0.5 percentage point in May, so July may be the first time you see that increase on your bill.
But small rate increases are only for good boys and girls. If you've been bad -- say, paid your bill late -- the bank may cancel your old rate and slap you with a higher, penalty rate.
The new rate applies not just to your new debt but also to the debt you already have.
The highest punitive rates I've seen, so far, come from Direct Merchants Bank in Scottsdale, Ariz.: 32.49 percent on a Gold Mastercard and 33.49 percent on a Web Miles Mastercard.
It's socked to people who've made three late payments within a six-month period, or are more than 60 days late on a single bill. For two late payments, your rate goes to 29.49 percent. At Associates National Bank in Irving, Tex., punitive rates range up to 30.99 percent.
You're stuck with these rates for a while, unless you can switch the debt to another card -- most likely, a card you already own. It's hard to get a good, new card with slow-pay on your record.
Direct Merchants spokesperson Mike Smith says that only a small percentage of cardholders are paying punitive rates. After making six on-time payments, your rate can drop by 1 percentage point. It takes years to work down to a decent rate.
Most of the top card issuers levy punitive rates today, says Robert McKinley, head of CardWeb.com, which tracks credit-card offers. Citibank, Wachovia and American Express Optima charge up to 24.49 percent. Chase charges up to 25.49 percent, CardWeb reports.
As a concept, punitive rates have been around for a while. But this is the first time they've gone so high, McKinley says. Also, many more banks are assessing punitive rates, and for more infractions, than was common a few years ago.
Typically, you're hit with a penalty rate if you make one or two payments late or go over your credit limit.
But here's a surprise: You might also be punished if you've always paid on time. Some banks check your credit report to see if you paid any other card late. If so, you're rated a higher risk and your interest rate goes up.
A payment is officially late even if you sent it on time but it got held up in the mail. To keep this from happening, smarties pay their bills early.
"The banks are playing hardball with consumers," says Pete Hisey, editor of Credit Card News in Chicago. In the old days, the top punitive rate was just a few points higher than regular rates. Now, the difference is large.
Some cards that charge a fixed 12.99 percent jump to 23.9 percent, if your payment is late twice in a 12-month period.
If you're late on one payment, you might also lose the low, introductory rate you received when you opened the account.
Late and over-limit fees may be added to these high rates.
You used to be able to get a late fee voided, if you called and threatened to cancel the card, Hisey says. Now the bank rep will instantly check your record, to see how profitable it is. Low-profit customers don't get any breaks.
Your bank doesn't send you a special notice, if it starts charging a punitive rate. You were warned when you first applied for the card.
Hmmmm. Did you miss it?
Punitive rates are disclosed in a box on the application, but the box might be scrunched on the back, in a sea of fine print.
The Federal Reserve, which regulates credit offerings, is proposing to make the box (and credit terms) more obvious. Still, it's up to you to check.