Source: Newsday
There are some traps credit-card companies have laid for consumers that can trigger a spiraling financial crisis, potentially leading to an endless cycle of consumer debt. One such practice, known as universal default, permits the companies to increase interest rates if a cardholder makes just one late payment to another credit card company or even pays a phone or utility bill late. That means if your credit card payment arrives past due, you risk having your interest rates raised on all your other cards.

Nearly half of U.S. banks use universal default, enabling them legally to raise consumers’ interest rates as high as 40 percent. Credit-card issuers justify the practice by saying it’s an indicator of increased risk - the higher the risk, the higher the rates. This hidden and unfair practice, however, is harmful to New York consumers.

To give an understanding of why credit-card companies don’t want universal default stopped, consider the potential for profit. There are approximately 30 million credit cards issued in New York State, with the average consumer holding more than four cards and 16 percent carrying 10 or more. Statistics for 2004 show that the average household credit card debt was $9,300 nationwide, and total card debt is currently about $800 billion nationwide. In addition to universal default, consumers face new penalty fees along with complicated and ever-shifting interest rates that are driving up the costs of using cards. For example, some issuers are charging cardholders a $5 to $15 fee to make a single bill payment by telephone, and between $2 and $13 to obtain a single copy of a billing statement.

In the 1980s, companies provided a 15-day grace period before fees were assessed or interest rates were raised. But today these charges can be issued even if your payment is just minutes late. Yet another practice, called double-cycle billing, charges interest on your current balance as well as your balance from the prior month, even if you paid on time. Information about these practices is often buried in the fine print of a credit-card agreement that can run 20 pages or more. Nationwide, banks collected a record $17.1 billion from such penalty fees in 2005, a 15.5-percent increase from 2003. Late-fee charges increased 160 percent over a 10-year period to an average of more than $33 per late payment in 2005.

More and more New Yorkers are at risk of higher debt from using credit cards; seniors and college students in particular are two groups that have been relying more on credit cards in recent years. A new study by the National Consumer Law Center says the average credit-card debt for consumers aged 65 to 69 has skyrocketed 217 percent in the past decade, to $5,844. Ten out of 12 colleges allow companies to set up tables on campus and offer free merchandise for students who apply for credit cards. This aggressive marketing is contributing to student debt. About 47 percent of college students have four or more credit cards. By the time they graduate, students often have doubled their average credit-card debt while tripling the number of credit cards in their wallet.

In March, Citigroup - one of the largest issuers of credit cards - announced it was voluntarily giving up use of universal default after congressional hearings and consumer groups began focusing more attention on this unfair practice. Although this is encouraging news, other major financial institutions have not followed suit, and those companies have enough tricks up their sleeves to make the day the credit-card statement arrives in the mail a day of high anxiety.