Not-So-Fantastic Plastic - problems with low-rate credit cards

Kiplinger's Personal Finance Magazine, May, 1999 by Joan Goldwasser

The lowest-rate credit card isn't always the best choice.

Credit card shoppers live by a long-standing motto: Go for the lowest rate if you carry a balance and for no annual fee if you don't. But that rule of thumb has developed a hangnail. The cards with the lowest rates and no annual fees are sometimes the ones with the most punitive nuisance fees--and the quickest trigger fingers.

"We've been getting tons of complaints," says Linda Sherry of Consumer Action, a consumer-advocacy group in San Francisco. Your complaints have reached us at Kiplinger's, too, about certain issuers that have appeared on our monthly list of low-rate and no-fee credit cards.

For instance, William Haburn of Salem, Ore., is one of several First USA cardholders who say they've been charged a late fee (usually $29) despite mailing payments at least a week in advance. (Some, like Haburn, have successfully disputed the charges.) Part of the problem is that First USA generally gives you lust 20 days between the end of your billing cycle and the payment due date, including round-trip mailing time. In effect, First USA subtracts another day by requiring your payment to arrive by 10 A.M. in order to be posted the same day.

DISAPPEARING DEALS. Low rates that leap unexpectedly are another source of cardholder complaints. Huntington Bank, also a regular on our low-fee list, sold many of its credit card accounts last fall to Direct Merchants Bank in Arizona, which raised interest rates from 8.5% to 17.4%. And Pulaski Bank, which had topped our list of low-rate cards for two years, raised its rate in January from 7.99% to 9.45%. All a card issuer must do before changing the rate--or any other terms--is give you 15 days' written notice.

Sometimes how you use your card can spark a rate hike. Todd Salter of Austin, Tex., saw the rate on his Associates Bank card jump from 14% to 20.99% when his balance rose from $1,500 to $2,000. Bank One boosts its rate from 9.99% to 19.99% if you are late twice in a six-month period.

With some exceptions, low-rate cards also tend to have high fees for exceeding your credit limit and taking out a cash advance. Capital One, for instance, charges just 9.9% on regular balances, but the interest rate is 19.8% on cash advances, on top of a 2.5% cash-advance fee.

To help you avoid back-door credit card expenses, we've revised our criteria for choosing the credit cards we highlight each month as Best Deals (see the table). We'll still favor low-interest-rate cards. But we will weed out cards with excessive fees for paying late or exceeding your credit limit and will take cash-advance fees and grace periods into account. And we will exclude cards that have prompted frequent complaints for customer-unfriendly practices, such as being too eager to assess late fees.

BEST DEALS

Low-interest premium cards Best if you carry a balance

                               RECENT RATE
ISSUER                         (INDEX+MARGIN)

USAA Savings (G,P)             8.75% (prime(*) + 1)
Pulaski Bank & Trust (G)       9.45 (discount(**) + 4.95)
Huntington National (G)        8.75 (prime + 1)

No-fee premium cards Best if you usually pay the balance each month

                               RECENT RATE
ISSUER                         (INDEX+MARGIN)

AFBA Industrial (G)            11.4% (prime + 3.65)
USAA Savings (G,P)             11.65 (prime + 3.9)
Amalgamated (G)                12.25 (prime + 4.5)

Rebate cards Best of the cash-back cards

                               RECENT RATE
ISSUER                         (INDEX+MARGIN)

Amex Cash Back (P)             17.74% (prime + 9.99)
Jefferson Smart Visa           15 (prime + 7.25)
Waterhouse National([dagger])  12.5 (prime + 4.75)

Low-interest premium cards Best if you carry a balance

                               CASH-ADVANCE   ANNUAL       LATE/
ISSUER                         RATE/FEE(c)     FEE      OVER LIMIT

USAA Savings (G,P)              8.75%/none      45        $20/none
Pulaski Bank & Trust (G)        9.45/none       50        20/$20
Huntington National (G)          8.75/2%-       49      15-25/20-25

No-fee premium cards Best if you usually pay the balance each month

                               CASH-ADVANCE   GRACE        LATE/
ISSUER                         RATE/FEE(c)    PERIOD    OVER LIMIT

AFBA Industrial (G)              11.4%/2%     25 days    $20/none
USAA Savings (G,P)              11.65/none    25 days    20/none
Amalgamated (G)                  12.25/2      25 days     25/$20

Rebate cards Best of the cash-back cards

                               CASH-ADVANCE   ANNUAL    REBATE ON
ISSUER                         RATE/FEE(c)      FEE       12,000

Amex Cash Back (P)             20.65%/2%       none         125
Jefferson Smart Visa              15/2          25          120
Waterhouse National([dagger])    12.5/2        none         120

Low-interest premium cards Best if you carry a balance

                                            TELEPHONE
ISSUER                                        NUMBER

USAA Savings (G,P)                         800-922-9092
Pulaski Bank & Trust (G)                   800-980-2265
Huntington National (G)                    800-480-2265

No-fee premium cards Best if you usually pay the balance each month

                                            TELEPHONE
ISSUER                                        NUMBER

AFBA Industrial (G)                        800-776-2265
USAA Savings (G,P)                         800-922-9092
Amalgamated (G)                            800-723-0303

Rebate cards Best of the cash-back cards

                               REBATE       TELEPHONE
ISSUER                          TERMS         NUMBER

Amex Cash Back (P)             up to 2%    800-843-2273
Jefferson Smart Visa              1%       800-443-5757
Waterhouse National([dagger])     1%       888-327-9962