It seemed like a great deal when her credit card company sent Lola Peterson a check and promised to charge her just 3 percent interest until she paid off the balance. She used the check to buy two hearing aids.
Then she noticed something fishy on her monthly statements: The 3 percent balance declined every time she sent in a payment, while the high-interest balance kept going up.
"It looks like the higher interest balance is being ignored and the payment amount I send in is only being applied to the 3 percent balance," she said. "Is this legal?"
Unfortunately it is. However, federal regulators and lawmakers are taking the consumers' side in this fight. The Federal Reserve has proposed new banking regulations and Congress is considering a bill that would put a stop to this and other practices that can only be considered abusive.
Fed chairman Ben Bernanke said there needs to be a "new baseline for fairness in how credit card plans operate. Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."
Consumers who have good credit and strong finances can tell their credit card companies to take a hike. That's what Donna Roberts of Palm Harbor did when her bank jacked her rate up from 9.99 to 29.99 percent. "Thirty percent to me is highway robbery," she said. "I can't believe a bank would actually do that." She tapped her home equity loan to pay off the card.
However, consumers who are struggling can be devastated by having to pay more in interest than they expected.
Key targets include:
. Payment allocations, the trick Peterson experienced. When an account has balances at more than one interest rate, banks commonly apply payments only to the lowest balance.
. Universal default. Credit card users who are late on one card can see their interest rates jacked up on other cards even if they have made payments on those cards on time.
. Sneaky changes in terms. There's widespread annoyance with issuers who change terms with little notice. The Fed says when an issuer raises rates arbitrarily, the old rate should continue to apply to existing balances except in certain circumstances.
. Fee harvester cards. These low-limit cards are a favorite with sleazy telemarketing companies that target consumers with bad credit. They charge consumers security deposits or membership fees for a card, then finance the charges, using up a huge chunk of the credit line.
. Credit card holds. Hotels, car rental companies and even gas stations commonly place "holds" on credit cards when the final amount of the transaction isn't known. The problem is that the holds can cause the consumer to go over the credit card limit and get hit with an over-limit fee.