Plastic Penalties

Then much to his shock, Martinez discovered in February that his card issuer had jacked up his interest rate to a whopping 29.99%. The reason: His $8,000 balance was dangerously close to the card's $8,800 limit. "It was really oddball," says Martinez, whose 790 credit score was high enough to get him any credit he applied for, at the lowest rates available.

Despite his pristine history, Martinez had encountered the latest scourge of the credit-card world: the so-called "default" rate, or punitive charges that credit-card companies can impose on customers suddenly deemed a higher credit risk. Default rates are typically triggered by things like a late payment or going over the credit limit. But they could also be the result of something as seemingly insignificant as running up a higher balance.

Martinez isn't alone. "I've been getting a lot of complaints lately about interest rates going up on credit cards, even by consumers who haven't been late with their payments," says Gerri Detweiler, author of "The Ultimate Credit Handbook" and a consumer credit educator. That's not surprising: With more people paying down debt as a result of a mandated increase in minimum payments, credit-card companies "have to look for a way to keep profits up," she says. A spike last year in personal bankruptcy filings and debt charge-offs also has cut into credit-card companies' profits. As a result, not only has the average card holder seen their APR go up, but more consumers are getting hit with penalty rates, Detweiler says.

In fact, because of a practice called "universal default," credit-card issuers are actually allowed to hike their rates for pretty much anything, according to consumer-watchdog group Consumer Action. In its 2005 Credit Card survey, Consumer Action found that 90% of card issuers would use a universal default rate hike if a customer's credit score decreases, 86% would do so if they paid a mortgage or any other loan late. Nearly half (43%) would hit you with universal default if they decide you have too much debt, while 33% would do it for the exact opposite reason: too much credit available. You can see a rate hike even if all you do is get a new credit card (33%) or shop around for a car loan or mortgage (24%).

Default and penalty rates are typically linked to the prime rate and — like credit-card rates overall — have been steadily rising over the past two years. Consider this: Between July 2004 and August 2006, the average variable credit-card rate has spiked from 11.58% to 16.34%, according to CardWeb.com, a credit-card information web site. Because creditors typically price their variable rate cards at around 9% plus the prime rate, according to CardWeb.com, this means the typical credit-card interest rate is now around 17.25%. Default and penalty rates could be higher than 30%.