Penalty Fees 

Late fees, over-the-limit fees, transaction fees, and bounced-check fees on credit cards were uncommon, if not unknown, in the mid-1980s. But as soon as a few large banks wised up to the fact that they could charge additional fees to cardholders who didn't pay their accounts as agreed, penalty fees became almost commonplace. These days, most issuers charge penalty fees, although you may find a few issuers that don't. 

Penalty fees can be very expensive, and in few cases do they actually reflect the bank's cost of processing the transaction. Besides, that is what interest is for: to cover the bank's costs and make a reasonable profit. Even worse, some banks will add the fee to your current balance and charge you interest on the fee as well as the balance! 

Wells Fargo Bank, one of the largest card issuers in the country, in 1991 settled a class-action suit over its over-the-limit fees. The verdict? It could not charge over-the-limit fees for the next four years, a loss of probably $1 million in fees it could have collected. Wells Fargo was also sued because of late fees. In a separate story reported in the February 16, 1989, issue of The Wall Street Journal, a California state court jury determined that Wells Fargo had illegally overcharged its credit card holders with its late fees of $10 and over-limit fees of $3 to $5. The total overcharge: $5.2 million. 

Here's what to look out for in penalty fees: 

Cash Advance Fees: Card issuers already can make a tidy sum off cash advances, since they usually charge interest from the day you take out the cash advance (regardless of whether you pay the balance in full at the end of the month). Often they make even more by charging higher interest rates on cash advances than on purchases. On top of that, most issuers add on a cash advance fee-as much as 2 to 4 percent of the amount of the cash advance (sometimes capped at $25 to $50)-simply for the privilege of borrowing cash instead of making a purchase. Be sure to check with your bank before you take out a cash advance to find out what kinds of fees they charge. 

A few issuers have advertised in the past that they charge a fee instead of interest right away, but don't assume that makes them a better deal. The banks that pulled that trick in the past charged more for the fee than it would have cost for one month's interest at their already high interest rates! And even those banks that do offer a "grace period" on cash advances will start charging interest if you can't pay the advance off in full by the due date. 

Late Fees: Some banks charge a fee of $10 to $35 if you fail to pay your bill on time. Most issuers used to wait until you were a full month behind before charging a late fee. Then some started charging if you fell behind by fifteen days. Now most will impose a late fee if you are just one day late with a payment. In addition, many cardholder agreements specify a time (say 11 a.m.) by which payments must be received on the due date in order to be considered on time. Your interest rate may also skyrocket if you are late with your payments. 

Over-the-Limit Fees: Card issuers shouldn't get away with charging an over-limit fee of $10 to $35, but they do. After all, if you are over your limit, you are either carrying a high balance (which likely means you are a profitable account for the bank, since you pay a lot of interest), or you charged a lot during the month (which also makes you a profitable account, since you generated income in merchant discount fees). 

If you go over the limit, your card issuer is likely to send you a notice asking you to pay the over-limit amount in full immediately. Regardless, you'll pay interest on the over-limit amount and may pay a penalty fee as well. Sometimes they'll charge an over-limit fee every single month until you are able to bring the balance down under the limit. 

Transaction Fees: These are particularly onerous because most consumers don't know about them until it is too late. A transaction fee is a fee that is charged each time you use the card. A typical transaction fee from a card issuer that charges one would be fifty cents per charge. Fortunately, most issuers don't charge transaction fees, but if you find one that does, you're probably smart to just say "no" to the offer. 

If you see this language on a credit card disclosure statement: "A minimum finance charge of fifty cents will be charged in any month during which a periodic finance charge is payable," don't confuse it with a transaction charge. This simply means that if your finance charge for the month is between one cent and forty-nine cents, it will be rounded off to fifty cents on your bill.