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%.

Negotiating Power
Back in 2003, a study by the U.S. Public Interest Research Group, a Washington, D.C., a consumer advocacy group, found that 56% of the consumers who called their credit-card companies to ask for a lower interest rate were able to get it within five minutes. That may not be as easy today, says US PIRG consumer program director Ed Mierzwinski. "They are being much more difficult because they're trying even harder to squeeze the last dollar out of your pocket," he says. "But if you're a good customer you should understand they don't want to lose you because the cost of acquiring new customers is very high."

Some prep work before asking for a lower rate will certainly help, says Scott Bilker, author of "Talk Your Way out of Credit Card Debt." "Look through your statements and tell them exactly how much you've spent on the card over the last two or three years," he says. "Tell them that business will be gone if they don't lower your rate."

Have at least one or two credit-card offers in hand before you call, says Linda Sherry, spokeswoman for Consumer Action. "Tell them, 'Look, these companies have sent me this preapproved offer. I'm seriously considering taking this, but I'm really loyal to you guys, and was wondering if you could take me down to 10.9%.'"

Alternatively, Bilker suggests, throw the credit-card company a bone. "Tell them, 'I'm buying a refrigerator. I could use your card, or I could use another card. Give me a special deal and I'll use you.'"

Jumping Ship
If the card company won't budge on the rate, it's time to switch cards. And while 0% APR offers certainly aren't as easy to come by as in the past few years, there are still offers available for folks with good credit, says Bilker. He keeps an updated list of such offers on his web site. So do web sites CardWeb.com and CardRatings.com. Bilker's advice: If you plan to transfer a balance, ask to do it at the time you apply. It increases your chances of getting approved.

But be wary of balance transfer fees, which lately have also been on the rise, warns Cardratings.com's Arnold. While most fees used to be 3% of the transferred balance, up to a cap of $50 to $75, many card issuers now charge 4% of the balance with a cap of $90, Arnold says. Notably, Bank of America recently eliminated the cap on its 3% fee. So on a $10,000 transfer, you'd be hit with a $300 charge.

One more word of caution: Credit cards typically apply payments to the balance that carries the lowest rate. So if you take advantage of a 0% or low-rate offer on balance transfers, be sure to put the card in a drawer until you pay that balance off. Should you charge up a balance by making purchases, your payments will be applied toward that balance, which will likely carry a higher rate. For more on this, click here.

That's pretty much how Martinez, of Idaho, handled his unexpected rate hike. He had no problem getting a new card, so he transferred the balance to one with a 0% APR offer and paid it off within the six-month introductory period. The experience has certainly turned him off to his original credit-card issuer, though. "I don't use that card anymore," he says.