It Sounds "Clear" and "Simple" - No More Late Fees - But Can You Afford It?
by Marvin Wolf, Esq.

According to industry experts, the credit card industry is expected to make a record $16.5 billion dollars this year on penalty fees, an increase of 11% over last year. However, due to continued customer complaints about outrageous late fees, some major credit card companies are showing their “sensitivity” by offering credit cards without annual fees or late fees. For example, American Express is offering a new card called “Clear” that contains no late fees at all, and Citigroup is offering a card named “Simplicity” that, in theory, waives the late fee if you use the card once a month. Commerce Bank offers a similar no-fee floating interest rate card if you are a bank customer.

“Clear” cardholders will be able to make one late payment every twelve months without the interest rate increasing. “Simplicity” cardholders, on the other hand, have no set quota for late payments but can have their interest rate changed based on re-evaluations of their account history.

What’s the catch? No-fee isn’t free. If a “Clear” cardholder pays late more than once a year, his interest rates can increase significantly. Also, interest continues to build when a consumer is late in paying since the grace period does not change. In fact, the increased penalty interest rates (up to 28.74% for Simplicity and 30.74% for Clear) can easily end up costing consumers more than the late fee ever did.

In contrast, if a consumer has an excellent payment history with his current cards, he can often get a late fee waived on a one-time basis just by calling the company. But faced with the attraction of greater profits from the new cards, credit card companies may be less willing to forgive a consumer for a one-time mistake.

Since, historically, no-fee cards have eventually been converted to fee cards, the supposed advantages of no-fee cards can easily evaporate. Also, many credit card agreements are now using “universal default” provisions, so even if a consumer does not face a late fee or interest fee increase for one late payment on a Clear or Simplicity card, that one late payment might still trigger an interest rate increase for the rest of his credit cards. In a worst-case scenario, a consumer could be confronted with high penalty interest rates added to all his cards.

Since monthly minimum payments are about to double, and the prime rate keeps increasing, these no-fee offers could actually be a clear and simple recipe for financial disaster - but let’s be gentle with the credit card companies. They are trying to be sensitive.

Marvin Wolf is a Newark attorney who specializes in consumer and bankruptcy law, real estate transactions and immigration. He practices in New Jersey and New York, and is admitted to the bar of the United States Supreme Court in Washington, D.C. He is a member of the National Association of Consumer Bankruptcy Attorneys, the Union, Essex and Middlesex County bar associations and has served as a volunteer consumer case arbitrator for the Better Business Bureau of Metropolitan New York. This article is intended to convey general legal information and should not be considered legal advice.