Beware of 'fixed rate' lure of credit cards

'Are you nutso?'

That was a question one reader posed to me recently. He thought I was wrong to advise a young woman not to transfer $13,000 of student loan debt to a credit card offering a very low interest rate.

But I'm not nuts, just realistic. I recommended that the woman with the student loan debt not do it because those low-interest-rate cards come with too many loopholes that allow a credit card company to hike the rate even if you sneeze wrong.

''You give folks far too little 'credit' for being able to monitor their situation," the reader scolded me.

It's not that I don't think people can't handle credit well; it's that folks sign up for these cards without reading or understanding the fine print, which states that minor missteps in the handling of their accounts can trigger increased rates -- significantly higher interest rates (much higher than the 8.25 percent fixed rate the woman in question was paying on her student loan).

Actually, to the dismay of some, you can do everything right and still have your credit card rate increased.

In fact, Minnesota Attorney General Mike Hatch is going after one giant credit card company for what he says is a deliberate attempt to mislead people into signing up for what they think are permanently fixed-rate credit cards.

In a lawsuit filed recently against two subsidiaries of Capital One Financial Corp., Hatch alleges that the company uses false, deceptive, and misleading television advertisements, direct-mail solicitations, and customer service telephone scripts to market credit cards with allegedly ''low" and ''fixed" interest rates that, unlike its competitors, will never be increased.

Capital One said in a statement that it has done nothing wrong.

I do believe that much of the advertising for credit cards doesn't emphasize that special low rates can be taken away for any number of bill-paying infractions -- making a single payment late (even by one day) or exceeding your credit limit.

However, what many consumers don't understand is that the word ''fixed" in the credit card world isn't the same as, for example, a 30-year ''fixed" mortgage loan. You can pay your mortgage late or not at all and your rate will be the same. You might get kicked out of your house or ruin your credit rating, but you won't get kicked up to a higher interest rate.

Not so with credit cards. A fixed credit card rate can be changed.

Hatch's suit alleges that consumers are not adequately informed of what can happen with a low-interest-rate card and cites case histories from several Minnesota cardholders. Here are some examples outlined in the lawsuit:

Nicole Bourgeois opened a credit card account with Capital One in July 2003. Bourgeois had seen a Capital One television ad offering low, fixed-rate credit cards. Based on the ads, she thought fixed meant the rate would not change for the life of the card. Bourgeois and her husband had wanted to consolidate debt from other credit cards into a single joint account with a low interest rate. Bourgeois received a card with a rate of 4.9 percent. But nearly a year after having the card, she noticed one month her rate had been increased to more than 14 percent. She called Capital One and was told that the increase was the result of one late payment.

Robert Stein said he found the prospect of a low fixed-rate card very appealing. He believed that the term ''low fixed rate" meant that the interest rate would stay at 4.9 percent for as long as he had the card. However, Stein's rate increased to 6.9 percent. Why? When he called to inquire, he was told his interest rate was increased because his payment was received two days past the due date.

Betty Ramsland obtained a Capital One credit card in 2002 with a fixed rate of 8.9 percent. Two years later, Ramsland's rate was raised to 14.95 percent. Ramsland said in the lawsuit she asked the company why her rate was increased but didn't receive an explanation.

Sure, some people move around debt from one low-interest credit card to another with no problem. But you're nuts to believe a promise of a forever fixed-rate credit card. Maybe it will stay fixed. Maybe it won't.

Michelle Singletary is a columnist for The Washington Post.