Laura Rowley Money & Happiness

Americans are in love with their credit cards. So you'd think they'd try to get to know them a little better.

But many consumers are clueless about the most basic aspects of their plastic, according to a new survey by GfK Roper on behalf of CreditCards.com, an online credit card marketplace.

Credit, Sex, and Denial

For example, nearly three-quarters of cardholders surveyed don't bother to read the terms and conditions of their cards. "People did seem to know the interest rate, but beyond that they just seemed ambivalent," says Jody Farmer, vice president of marketing for CreditCards.com.

In addition, more than 90 percent of survey respondents believe they have the same amount (or less) debt as the average American. The survey based its number -- $9,300 per household -- on a figure published by CardWeb.com, which divides the outstanding revolving debt by the number of households with credit cards.

"I equate it to sex surveys, which are notoriously inaccurate because people won't own up to how they actually behave," says Farmer. "There's a high level of denial." The other possibility: Ten percent of the population has huge revolving balances that skew the numbers higher.

Meanwhile, more than 9 in 10 Americans don't know how long it would take to pay off their credit card bill if they made only the minimum payments. Asked how long it would take to wipe out a $1,000 charge, 55 percent underestimated the actual time of 7 to 8 years; 31 percent overestimated; and 7 percent didn't know.

Unfair Disclosure

The cost of borrowing money on credit cards has tripled -- even after adjusting for inflation -- since the onset of banking deregulation in the early 1980s, according to Robert Manning, author of "Credit Card Nation: The Consequences of America's Addiction to Credit." The culprits? Major court rulings that allow lenders to charge whatever interest rate the market will bear, along with a variety of new fees and punitive clauses.

Consumer advocates and members of Congress are calling on financial firms to end these egregious practices. "We do believe consumers have a responsibility to make smart decisions," says Stephen Brobeck, executive director of advocacy group Consumer Federation of America. "But the true terms and conditions [of credit cards] are not clearly disclosed, and are not able to be understood by most people."

A September 2006 report by the General Accounting Office concurred. The report found that credit card disclosures were "written at a level too difficult for the average consumer to understand. ... When attempting to use these disclosures, cardholders were often unable to identify key rates or terms."

Brobeck would also like credit card issuers to make the numbers clearer to math-challenged borrowers. "We believe that consumers need to know exactly how long it would take to pay off a revolving balance and the total expense if they only pay the minimum -- and that should be clearly disclosed on the monthly statements," he says.

The Five Biggest Pitfalls

For the pathological optimist who hasn't read his card's fine print, here are the biggest traps to avoid:

• "Any time, any reason"

This clause says your card company can jack up your interest rate and change the fees whenever it wants to, for any reason.

"One of the most egregious practices is hair-trigger re-pricing, particularly moving people quickly from low rates to high penalty rates," says Brobeck. "Issuers try to justify it by claiming they're simply pricing to risk, but in our view, it's simply predatory pricing."

Happily, ahead of Senate hearings on credit card company practices held this March, Citi announced that it would eliminate the "any time, any reason" clause and keep rates and fees on its cards constant until the cards' expiration dates.

• Over-limit fees

According to the 2007 Credit Card Survey by Consumer Action, a San Francisco advocacy group, some 94 percent of cards charged over-limit fees of $20 to $39 -- and they can be assessed monthly until the balance falls below the limit.

At the March Senate hearings, Chase CEO Richard Srednicki apologized to an Ohio customer hit with 47 separate over-limit fees on the same original balance. The cardholder's debt had tripled to $10,700 from $3,200, despite making steady payments and incurring no new charges. Chase said it will no longer charge more than three consecutive over-limit fees.

• Late fees and penalty rates

More than one-third of consumers paid a credit card bill late during 2005, according to the GAO report. The average late fee more than doubled to $28 from $13 between 1995 and 2007, according to Consumer Action.

Some 85 percent of late payers are slapped with penalty interest rates, Consumer Action found, up from 79 percent in 2005. The average is 24.51 percent, but they can run as high as 32.24 percent. All of the banks surveyed require the cardholder to ask for a reduction in the penalty rate -- it's not automatic.

If you typically pay on time and get hit with a late fee, ask the company to remove it. I did this on a recent bill that fell to the bottom of my to-do pile when I left for a business trip. It took a three-minute call to have the charge erased. (I always pay the bill in full.)

• Two-cycle billing

This is a method of calculating credit card interest up until the day full payment is received. It's based on two billing cycles, instead of determining interest only on the immediate billing cycle.

Example: You owe no money on July 1. Then you head to the beach for a holiday, and charge it to the card. On August 1 you get a bill for $2,050. You pay the bill on August 21, but you only pay $2,000 instead of the full amount. On your next bill, the company will charge you interest on both the $50 outstanding and the $2,000 you paid on time.

Consumer Action discovered that 9 of the 20 banks surveyed employ the practice, including giants such as Bank of America, Capital One, HSBC, and Citi. Chase announced it would end the practice earlier this year.

• Universal default clauses

Imagine you have a credit card with a 3.9 percent interest rate, which you pay on time and in full. Then you pay another credit card bill late. It's not unusual to see the card with the 3.9 percent rate skyrocket to 28.9 percent, according to Manning. The credit card issuers argue that your behavior with other debts indicates that you're a greater credit risk.

In March, prior to the Senate hearings, Citi announced that it would eliminate this practice. Such changes may become the trend amid pressure by Congress and consumer advocates, says Brobeck: "I'm fairly certain that major issuers will continue to make significant improvements in products."

For more tips on credit cards, see my blog.