“When Jennifer Reid opened her credit-card statement in April, she discovered how expensive it was to make full use of her credit,” writes Mitchell Pacelle in today’s Wall Street Journal.

“The 42-year-old X-ray technologist had run through $10,000 of her $12,000 credit line on an MBNA Corp. card. In April, her annual interest rate abruptly jumped to 24.98%, up from 19.98% the prior month and far above the initial single-digit rate.”

” ‘I don’t understand,’ she recalls telling an MBNA customer-service representative on the phone, complaining that she hadn’t been late with a single payment. The representative agreed but pointed out that she had run up more than $5,000 of debt on two other cards. Also, she was making only slightly more than the minimum suggested monthly payments on her MBNA card. He said the company now saw her as a credit risk and feared it would take her forever to pay off her debts. ‘Isn’t that what you want consumers to do?’ she snapped back.”

“That’s a question more financially strapped bank customers are asking these days. For consumers who pay off their credit-card balances each month, shop aggressively for interest rates as low as 0%, and take advantage of generous credit-card rewards programs, consumer credit has never been cheaper. But for others like Ms. Reid, who went into debt so she could move to a better job in Florida from South Carolina, the trend is in the other direction.”

“Card users, consumer advocates and some industry experts complain that banks are attempting to squeeze more and more revenue from consumers struggling to make ends meet. Instead of cutting these people off as bad credit risks, banks are letting them spend — and then hitting them with larger and larger penalties for running up their credit, going over their credit limits, paying late and getting cash advances from their credit cards. The fees are also piling up for bounced checks and overdrawn accounts.”

” ‘People think they are being swindled,’ says industry consultant Duncan MacDonald, formerly a lawyer for the credit-card division of Citigroup Inc. Penalty fees aren’t new, but they are becoming more important to the industry’s bottom line and are being borne by the people who can least afford to pay them, he contends.”

“Cardweb.com, a consulting group that tracks the card industry, says credit-card fees, including those from retailers, rose to 33.4% of total credit-card revenue in 2003. That was up from 27.9% in 2000 and just 16.1% in 1996. The average monthly late fee hit $32.01 in May, up from $30.29 a year earlier and $13.30 in May 1996, the company said. In 2003, the credit-card industry reaped $11.7 billion from penalty fees, up 9% from $10.7 billion a year earlier, according to Robert Hammer, an industry consultant.”

” ‘As competitive pressure builds on the front-end pricing, it has pushed a lot of the profit streams to the back end of the card — to these fees,’ says Robert McKinley, chief executive of CardWeb .com. Over the past two years, he said, ‘it’s become much more aggressive.’ At industry conferences, he notes, talk often turns to ‘what the market will bear.’ “

“Banks say that penalties and fees are a necessary component of new models for pricing financial services. Gone are the days when banks collected hefty annual fees on all credit cards and charged fat interest rates to all customers. Now, the banks say, they must rely on risk-based pricing models under which customers with the shakiest finances pay higher rates and more fees.”