Credit card companies' evil tricks

By Liz Pulliam Weston

Parents spend the first several years of children's lives teaching them how to play fair. By the time we hit elementary school, most of us are pretty good at knowing what's just and what's not.

That sense of fair versus foul, though, tends to get tangled up in the world of credit cards. Some practices that seem egregious at first glance actually make sense when you understand their rationale. Other policies don't hold up so well to scrutiny, even though they're widely accepted in the industry.

What makes matters more complicated is that a few credit card issuers are bad to the bone. Some of the companies that have the most consumer-friendly practices in one area turn around and punish their customers unfairly in another.

After many years of covering this industry, fielding reader complaints, talking to the issuers and listening to consumer advocates, I've drawn up the following list of what I consider fair and foul play, plus what you can do about it.

Mystery interest rates

Fair play: charging different customers different interest rates or offering different terms, based on their credit histories.

Foul play: not telling folks upfront what interest rates or terms they'll get.

If you have a good credit history, you should get a good rate, not one that's been inflated to cover the risks of others who haven't been as responsible.

But no one should have to play Russian roulette when applying for a card. Though some issuers, including Citibank and Capital One, usually tell you in advance what rate you'll get if approved, others -- including Chase, Discover, American Express, HSBC and Bank of America -- typically only offer a range of possible rates. You might get a rate that's in the single digits or one that's over 20%.

"In the best of all worlds, you would fill out an application, be told what interest rate you are approved for, then be given the chance to OK that rate or decline the offer. It rarely works that way," said Justin McHenry, the research director for IndexCreditCards.com. "Oftentimes you won't even know what rate you've been approved for until the card shows up in the mail."

Many times the terms are variable as well. A card may offer 0% for "up to" a year, for example, but once you've applied, you may get the touted rate for as little as three months, said Jeffrey Weber of SmartCreditChoices.com.

Credit limits are almost never disclosed in advance, either. This can be a serious issue for people transferring balances because shifting debt from a high-limit card to a lower-limit card can damage their credit scores.

• Video on MSN Money: How's your credit?

Your best move: Don't hang on to a card you don't want. Though closing cards can never help your FICO credit scores and may hurt them, the damage isn't likely to be as serious with a newly issued card as it might be with one you've held for many years.

But you shouldn't apply willy-nilly for cards, either, because each application can potentially ding your scores. Also, some lenders may look askance at a borrower who rapidly opens and closes accounts, McHenry said, thinking such customers will be unprofitable.

If you're looking for a lower rate, first contact your existing issuer and negotiate for one. Read "Get a better deal . . . with a threat" for tips. If you plan to apply for a new card, know your FICO scores so you have an idea of what interest rates you're likely to get. You can get a ballpark idea of your scores from MSN Money's credit score estimator; generally, folks with FICOs above 720 get the best credit card rates and terms.

Slanted reports

Fair play: reporting your missteps to credit bureaus.

Foul play: reporting half-truths.

The credit reporting system in the United States has some serious flaws. Creditors wield too much power, and it's too hard for consumers to fix mistakes.

But overall, the system has succeeded in making credit more widely available, which is a boon to savvy consumers. If you get credit and use it responsibly, you can build a credit history that allows you to get the loans you need to buy a home, build a business or accomplish other goals.

What irks me, though, are lenders that deliberately make their customers look like worse credit risks than they are. Some of the worst offenders are issuers that don't report their customers' on-time payment records at all. Next on the list are those that don't report their customers' credit limits, like Capital One.

When a lender doesn't report a customer's credit limit, the bureaus typically use the "highest balance charged" as a proxy for the limit. The problem comes when borrowers charge about the same amount each month.

Here's how it works: If you use $300 of a $1,000 limit that's properly reported, the all-important credit-scoring formulas figure your "credit utilization" at 30%, and that's good. If your limit isn't reported and the highest balance you ever had was $300, it looks like you're using 100% of your available credit -- and that's bad.

It makes sense not to report a credit limit when a card has no preset spending limit, as is the case with many American Express cards. But folks that have those types of cards tend to have pretty good credit to begin with, so the lack of an accurate credit limit on one account isn't likely to hurt much. The people who really get crunched are the people with short or troubled credit histories who are trying to do things right but are unknowingly being penalized by their credit issuers' practices.

Your best moves: If your issuer isn't properly listing your credit limits, you can request that they do so. If your issuer is Capital One, though, you're out of luck. You can either charge up a big balance to reset your "highest balance charged" or switch to another card issuer.

Soaring rates

Fair play: raising your interest rate if you miss a payment.

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