In its new credit card study, Consumer Action (CA) uncovers the top reasons that lead banks to impose high universal default and penalty rates. It found that virtually everyone is vulnerable.

"The factors cited by card issuers are very broad. It appears that anyone -- not just people in financial difficulties -- could be subjected to a much higher rate for very insignificant reasons," said CA's Linda Sherry, who coordinated the survey.

Universal default

Credit card companies impose "universal default" rate hikes based on the way customers handle other credit accounts. This year, 45% of banks surveyed by CA said they have universal default policies - a slight increase from last year's survey. According to customer service representatives, the following circumstances, in descending order of importance, can trigger a universal default rate hike:

• Credit score gets worse: 90%
• Paying mortgage, car loan or other credit obligations late: 86%
• Going over credit limit: 57%
• Bouncing a payment check: 52%
• Too much debt: 43%
• Too much available credit: 33%
• Getting a new credit card: 33%
• Inquiring about a car loan or mortgage: 24%

CA found default rates as high as 35% (Merrick Bank). Runners-up for the highest default rates are Citibank and Providian at 29.99%.

Eleven of the 21 banks with universal default policies are willing to reduce the higher rates if cardholders' credit histories improve. Three more banks said it was "possible." Twelve of them said that after six months of improved credit, the rate might be adjusted downward although not always to the original rate.

Penalty rates

Penalty rates are much higher interest rates triggered when you pay your credit card bill late - even once. Late payments are not the only reason issuers impose higher penalty interest rates. Going over your credit limit or bouncing a payment check can trigger a rate increase, too, in addition to hefty fees.

The average penalty rate this year is 24.23%, up from the 2004 average of 21.91%. This increase may be attributable to the fact that many penalty rates vary with the Prime Rate, and from last year's survey to this year's the Prime Rate increased two percentage points (from 4% to 6%).

Late payments result in higher penalty rates with 79% of the issuers - a drop from 85% of the issuers last year. But of the issuers who assess penalty rates, 43% said a penalty rate could be triggered by just one late payment. Last year just 31% assessed a higher rate after one late payment.

More findings

CA's yearly snapshot of credit card industry practices, conducted between April 1 and June 21, examines 146 credit cards from 47 banks. The average interest rate for all cards is 12.61%, ranging from 6% (Ranier Pacific, Town Bank and Wells Fargo) to 24.94% (Merrick Bank). Of the total, 118 cards have variable rates, with an average interest rate of 12.96%, and 28 cards have fixed rates, with an average rate of 11.15%.

• Bounced check fees. If your payment check to your credit card company bounces, 42 (89%) of the surveyed banks will charge you a fee. The average bounced check fee at these banks is $28.61. The fees range from $15 (First Internet Bank of Indiana) to $38 (American Express).

• Late payments. Of 146 surveyed cards, 138 (95%) carry late payment fees. The average late fee this year is $27.46, only a penny off the 2004 average. Thirty-two issuers (68%) assess a late fee immediately if the payment is not received by the due date.

• Over-limit fees. Of the 138 cards (95%) with over-limit fees, the average fee is $30.18. The fee can be as high as $39 at Citibank and MBNA.

• Cut-off times. CA found that 34% of banks set a cut-off time on the due date. Payment deadlines on the due date ranged from noon local time to 9 p.m. Eastern time.

• Credit limits. Twenty-five (53%) surveyed banks said that they reduce cardholders' credit limits under certain circumstances, including late payments, going over limit or when your credit score declines.

• Annual fees. Cards without annual fees are the majority at 68% (99 cards). Of the 47 cards with annual fees, the average fee is $43.27 - an increase of 16% from last year's $37.33.

• Cash APRs. Of the 146 cards surveyed, 75% have a higher APR for cash advances taken with the card. The average cash advance rate on these 110 cards is 20.23%. On cash advances, the interest begins to accrue immediately, even if you do not carry a balance.

• Cash advance fees. Among surveyed cards, 137 (94%) have cash advance fees that average 3.01%. The cash advance fee is limited to a maximum charge on 35 of the cards. Maximums range from $10-$75 and average $41.28. A minimum charge applies on 132 of the cards. The minimums range from $2-$15 and average $6.98.

• Balance calculation. Five surveyed banks (11%) use two-cycle billing. Cards issued by Chase, Discover, National City Bank, Providian and First National Bank of Omaha employ two-cycle billing.

• Arbitration. Twenty-one (45%) of the surveyed banks confirmed that they require consumers to settle disputes using arbitration. Of those banks, 15 (71%) insist on "binding" arbitration decisions, which prevent cardholders from appealing the decision.

• Introductory rates. 70 cards (48%) offer teasers on new purchases, 91 (62%) on balance transfers and 22 (15%) on cash advances or credit card "convenience check" transactions.

• Reward cards. Among the surveyed cards, 52 (36%) offer rewards such as cash, miles, auto purchase points, merchandise points and gasoline. The overall percentage of credit card offers from surveyed banks with rewards has increased sharply since last year's 23%.

"We see a shift in the industry toward cards that give something back, because industry research shows that reward cardholders make more purchases, tend to use their rewards cards exclusively and are less likely to jump ship for lower-rate cards," said Sherry.

Consumer Action, founded in 1971, is a non-profit education and advocacy organization based in San Francisco, CA, with offices in Washington, DC, and Los Angeles, CA.