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Rarely has a business inspired such visceral outrage as First USA, one of the nation's largest issuers of credit cards. Richard Deadrick, for example, calls the company "vicious" and "predatory." Deadrick, of McGaheysville, Va., regularly mailed his credit card payments to First USA's payment-processing center in Atlanta a week before the due date. "I felt safe that a week was enough time," he says. But twice in early 1998 he was charged a $25 late fee. The first was waived after Deadrick complained. He decided to pay the second ("it may have been close") and cancel the account. But the late-fee payment, too, was deemed late, and he was charged another $25. This time, he refused to pay and canceled the account in writing.

Over the next seven months, First USA continued to pile on late fees and interest charges, Until the total reached more than $150. Letters to the president of the Wilmington, Del.-based bank, the federal Office of the Comptroller of the Currency (OCC) and Delaware's attorney general didn't help. In January, Deadrick e-mailed Kiplinger's to ask for assistance. After we placed a call to First USA's vice-president of corporate affairs, "all of a sudden, out of the clear blue sky," says Deadrick, "a credit comes through."

Complaints like Deadrick's about First USA's unfair fees and charges have been pouring in, not just to Kiplinger's and other media, but to Better Business Bureaus, federal and state regulators, plaintiffs' attorneys who have filed class-action lawsuits against First USA, and the public at large through Internet discussion groups.

Customers, and even former employees, spew forth venom on at least two Web sites devoted to just that purpose. They profess "unmitigated hatred," bemoan "how I got screwed," brand the bank as a "den of liars and thieves," and worse. One Web page opens with an animated graphic of a man marching barefoot across the screen. When he reaches the words "1st USA," he drops his drawers, grins and douses the logo, a la Calvin and Hobbes.

By far the most incensed are consumers who say they have been slapped with late fees and sometimes sky-high penalty interest rates, despite having mailed their payments well before the due date. "All the other checks I mailed at the same time as the First USA check were cashed in a timely manner," says James Manos of Cranford, N.J. "It's extremely hard to believe that it takes more than 20 days for my check to reach them. I think they're making a lot of money on fees and finance charges that they have no right to charge."

First USA is not the only bank to come under fire for imposing unfair fees and charges. Providian Financial Corp., for instance, refunded $20 million in late fees last summer after several lawsuits were filed in the spring. "We have been through this with others," says Frances West, president of the Better Business Bureau in Wilmington, Del. "This is just First USA's turn."

Over the line?

Banks that issue credit cards are also in the doghouse with John Hawke, who as Comptroller of the Currency is the nation's chief regulator of federally chartered banks. At a banking-industry conference in June, Hawke warned of "mounting evidence of an increase in banking practices that are seamy, if not downright unfair and deceptive--practices that virtually cry out for government scrutiny." Some of that scrutiny has been directed toward payment-posting practices at First USA and other banks. During the first half of 1999, the OCC received 2,793 complaints about First USA (about one-fifth of which alleged late posting of payments), more than for the next nine largest bank issuers combined.

Sen. Phil Gramm (R-Tex.), who is chairman of the Senate Banking Committee, has also directly received complaints about payment-crediting delays at First USA, and in April he asked Hawke to look into the allegations. "OCC supervisory staff has already met with management of the banks," Hawke wrote in response in June. "If our investigation determines that a bank has violated the Truth in Lending Act requirements for prompt crediting of payments, we will direct the bank to change its procedures and to adjust the customer's account to deduct any related late charges or finance charges. In some instances, corrective actions have already been taken."

First USA acknowledges that it has been in talks with OCC bank examiners, and that some payments made to a third-party payment-processing facility in Phoenix were not posted promptly. But Carter Warren, First USA's executive vice-president of portfolio marketing, says the bank's internal audits caught the problem and that the OCC came in "at our request, frankly."

"If you've got too many payments one day and you don't have enough people to process them, our policy is that the payment will be date-stamped and backdated to the day we received it," Warren says. "What was happening in Phoenix was that those accounts were not being backdated."

To remedy the problem, First USA says, it reviewed all the accounts processed in Phoenix between November 1998 and March 1999, and refunded late fees and interest charges to customers who were affected. The bank has pulled out of all three of its outside payment-processing centers--in Atlanta and Louisville as well as in Phoenix--and moved operations to in-house facilities in Las Vegas, Elgin, Ill., and Wilmington, Del.

First USA has made policy changes, too. Starting in June, the bank added a "courtesy day" to the payment-due date, so that payments arriving within 24 hours of the due date do not incur late fees. And "because our awareness of customers' sensitivity to this has grown," Warren says, the bank will no longer charge a late fee if your balance is less than $50 (a policy that would have prevented Deadrick's ordeal).

Tip of the iceberg?

But the Phoenix processing center has not been the only source of problems at First USA, and many of the issuer's disgruntled customers are far from satisfied. Darrell and Elizabeth Essary of League City, Tex., mailed their payments to First USA's processing center in Louisville after opening an account with a 3.9% introductory rate last September. They sent their first payment on the account on October 10, to meet an October 19 due date. But the payment wasn't posted until October 25, and their next statement arrived with a $20 late fee.

Hoping to avoid further problems, the Essarys enrolled in an automatic-payment program, authorizing First USA to debit payments directly from their checking account. But in December their payment was posted seven days late--even though First USA now controlled when the payment would be withdrawn--and their January statement showed they had been charged another late fee.

Compounding the absurdity, their February statement showed that their interest rate had been increased from 3.9% to 22.9%. It is First USA's policy to levy a penalty interest rate on cardholders who are late two or more times in a six-month period, and many customers who believe their payments were posted late have complained about similar hikes in their interest rate.

"They think `arrival' is not when it arrives at the post office box but when they get around to posting it," says the Essarys' attorney, Britton Monts of Monts & Ware in Dallas. Monts is seeking class-action status for the lawsuit he filed against First USA in May on behalf of the Essarys and other plaintiffs.

He said, she said

First USA says it posts payments on time, in compliance with the Federal Reserve Board's Regulation Z, which requires payments to be credited to a customer's account on the day of receipt. But a late-posting complaint is a "he said, she said" dispute, observes Craig Stone, deputy to the ombudsman at the OCC's customer-assistance center in Houston (consumers with a question or complaint about a national bank can call the center at 800-613-6743). "Unless we've got an examiner in the mail room who can find the letter and make sure it was posted that day, it's difficult to prove one way or the other," Stone says.

Interviews with former First USA employees also indicate that payment-posting problems may not have been limited to the five-month period at the Phoenix facility for which the bank has issued refunds. "Posting late was probably the second-biggest complaint after the interest rate," says Jonathan Davis, who worked as a customer-support representative in First USA's collections department in Orlando from September 1997 to December 1998. "The site manager said they had an independent payment-processing company in Georgia that was so incompetent that we fired them and replaced them with a new payment center in Kentucky. I think that helped a little," Davis says.

When he received a complaint, Davis says, he was told to "tell customers to mail in their payment seven to ten days in advance and to basically blame it on the post office. There's no way to verify when payments were sent."

Linn Pierce of Irving, Tex., says she quit her job in the collections department in Dallas after two months because she felt customers were not being treated fairly. Customers "would send me copies of their checks with the dates on them and I'd see when we posted them. We had to be holding those checks," Pierce says. When she showed the checks to supervisors, "they'd say, `Too bad it didn't get posted.' They kept blowing me off."

Pierce says her tenure at First USA, from November 1996 to January 1997, contrasted sharply with her experience as a customer-service representative at American Express for eight and a half years. "There, if you saw something that helped the customer and brought it forward, they were grateful."

"In the course of business, we will have mistakes that do happen. But we have not had any sort of systemic problems in Atlanta or Louisville like we had in the Phoenix operation," says Dave Webster, First USA's first vice-president of corporate affairs.

The payment squeeze

Even if there is no delay in posting, cardholders have to be more careful than ever to get payments in on time because payment deadlines have gotten tighter. "Over the past year and a half, First USA and other credit card banks have adopted hypertechnical and misleading payment-crediting guidelines that are increasing fee income and pushing consumers deeper into debt," the Dallas lawsuit alleges.

The lawsuit's chief complaint: While the official payment-due date is printed on the front of your bill, tiny print on the back of the statement discloses that only payments that arrive by 10 A.M. are posted on the same business day (until recently, the cutoff time was 8 A.M.). That effectively shaves a day off the amount of time you have to pay. First USA also sets some due dates on weekends and holidays, so if a payment is due on a Sunday, it really needs to arrive before 10 A.M. Friday to be on time. The complaint alleges that "the whole scheme is a trap designed to collect fee revenue," and that "consumers by the thousands have fallen into this trap."

Until First USA changed its policy and granted a courtesy day in June, there was no leeway in the deadline. "When I first got there, there was a grace period," says Davis, who began working at First USA in September 1997. If a payment arrived within a few days of the due date, it was considered on time. "They took that away just a couple of months later," Davis says.

A 20- to 25-day billing cycle (shorter than it was several years ago) tightens the squeeze. Once you allow for mailing time in both directions (First USA recommends allowing seven to ten days for your payment to arrive by mail), you may have a week or less to pay your bill. If you take a week's vacation or business trip, you may have to make special arrangements to pay on time by mail.

West says the Wilmington BBB has been receiving 30 to 50 complaints a week about First USA and has been talking regularly with company executives. "I've told them, if you make it impossible for people to perform simply to generate late fees, that's not ethical behavior. We hope you're not playing gotcha."

First USA's Warren says that a 9 A.M. or 10 A.M. cutoff is standard for credit card and other payments, and is reasonable because most mail travels in the middle of the night and arrives early in the morning. "Then we have added a courtesy day, which makes the 10 A.M. cutoff moot," she says. Overall, payment time frames are tighter because "as we have offered lower and lower interest rates, it has become necessary to make sure customers are paying us on time."

Unhappy shareholders

Fees have become an important source of revenue for First USA and its parent company, Bank One. In 1998 the bank's credit-card-fee income rose nearly 32%, from $2.5 billion to $3.3 billion, and the bank was projecting continued growth in 1999. But First USA's aggressive push for fee income suffered a setback over the summer.

In late August, Bank One announced that it would not meet earnings expectations because of an earnings shortfall at First USA. One of the chief reasons: an increase in the percentage of cardholders who had canceled their accounts. "We took certain pricing initiatives in our desire to make a 2.9% return on outstandings," First USA chairman and CEO Richard Vague told securities analysts in a conference-call meeting. "We began assessing late fees at due date instead of giving customers a day's grace period. That was done to increase revenue," Vague said. Instead, it increased the bank's cardholder attrition rate.

Vague also told analysts that he expects credit card profit margins to drop this year because of the customer attrition, an end to "accelerating" late fees, and planned interest-rate concessions to customers designed to boost the issuer's retention rate. "The impact will be in the area of $500 million over the next couple of quarters." Bank One's stock price fell nearly 13 points on the day of the earnings warning, to $43 a share, and most analysts lowered their rating of the stock.

"What was the imperative to do all these repricing and late-fee moves all at one time? Didn't you run the risk of a train wreck?" one analyst asked at the meeting. Replied Vague: "We had an ambitious budget and earnings targets that ended up being high, and we were very anxious to deliver on those targets."

"Repricing" credit card accounts is another practice by issuers that has drawn fire--and lawsuits. When an account is repriced, the bank changes the card's fixed interest rate, usually raising it. Card issuers are allowed to make such a change with only 15 days' written notice--often to the surprise of those who sign up thinking "fixed" means "forever," or at least more than a few months.

In the meeting with analysts, Vague said that First USA would attempt to regain some of its earnings by "selectively repricing" underperforming accounts later this year and into 2000.

What you can do

The U.S. Postal Service says that about 90% of all domestic mail arrives at its destination within three mailing days. So why does First USA ask cardholders to mail payments seven to ten days in advance of the due date? "That is to protect the customer," says Warren. "That is part of the process that we don't control, so we encourage customers to give themselves some room."

While that cushion may seem excessive, the best approach for consumers who want to stick with a card issuer that's aggressive with late fees is to avoid cutting it close. If you have a low-rate credit card with no annual fee that offers air miles to boot, consider it the price of those benefits to send your payment almost as soon as the bill arrives. And don't confuse the postmark date with the payment-posting date. "I read letters every day from consumers, and there may be a belief that once it s put in the mail, it's the postmark date that matters," says Craig Stone of the OCC. "But it's really the received-by date."

* Pay electronically or by phone. Your payment may be credited more quickly if you pay by computer or telephone. First USA, for instance, says that payments made via its Web site or by telephone should be posted to your account within 48 hours (in both cases, you authorize the bank to withdraw the payment from your checking account). You can also arrange for payments to be debited automatically from your checking account, although the Essarys found that that method wasn't foolproof. Using personal-finance software or your own bank's bill-paying service can take two to four days, but the onus is on you to ensure the money gets there. And that route isn't always foolproof, either (see the box on page 106).

* Set your own due date. If your usual due date falls on an inconvenient day, ask the bank to adjust your billing cycle so that the due date falls after payday or after you normally sit down to pay bills each month.

* Do it their way. Regulation Z, the law that requires banks to credit payments the day they're received, has a significant loophole that allows creditors to delay posting for up to five days if they accept payments that do not conform to their written requirements, which must appear on or with the monthly bill. For instance, First USA requires that the payment be made by check or money order and accompanied by the payment coupon, both of which must be sent in the envelope provided or to the location printed on the front of the statement. Anything that deviates from those rules can legally be posted late (the law does make accommodations for cardholders who pay electronically).

* Read statement stuffers. Notices of higher fees, interest-rate hikes and other changes in terms often go unnoticed by consumers because they're tucked into a packet of solicitations with their statement. West says she's gone after card issuers for impossible-to-read disclosures--in darkgreen print on a light-green background, or purple on violet, or in print so small "I had to get out a magnifying glass in good light to read it." "They're burying the notices," West says, "but it's legal, and that's why if they're not careful, they're going to be reregulated."

If all the precautions don't seem worth it, or if you run into trouble anyway, you can always follow the example of the millions of cardholders who have headed for the exits. As Bank One president John McCoy put it, "With all the competition, if there's any customer-service issue--anything at all--it's very easy to switch."

Reporter: Courtney McGrath

RELATED ARTICLE: The check is in the ether

I KNOW THEY didn't single me out on purpose, but in the midst of reporting this story, I had my own run-in with First USA. The first snarl come with my July credit card bill. rd paid my June bill in full, but the $513 payment, due July 18, had not been posted by the statement dosing date of July 26. So First USA charged me a $29 late fee.

Naturally, my July balance was huge--it included more than $7,000 worth of home-remodeling expenses I'd put on the cord--so the damage also included $77 in interest. Ouch.

But my bank statement was in the same mail delivery, and it showed the $513 payment clearing the bank on July 15. So how hard could it be to Straighten it out? Here's how hard:

The customer rep at First USA quickly agrees to waive the penalty and interest charges and says she'll research the problem. A few days later I get confirmation in the mail that my account has been credited $106.

The payment was made electronically, via Quicken and Citibank, which I've used to make my credit card payments for two years. On August 8, I transmit instructions for my next payment--for the full $8,389 balance--to be transferred on August 15. The due date is August 20. On August 24, I check my statement online. No July payment yet and no August payment, either. I check with Citibank to find that the $8,389 left my account promptly on the 16th.

Now I'm worried. Another First USA customer-service rep takes my complaint and promises to credit my account with the full payment while the bank investigates. Will that free up some of my credit line, which is now close to the limit? No, the credit is temporary. I Mss a big hunk of frequent-flier miles goodbye and pay the next remodeling installment by check.

About a week later my August statement arrives. The $513 payment has been credited to my account, back-dated to July 15. The $8,389 payment still has net been posted, but the statement notes that I'm not required to pay the amount "in dispute." No late fees or finance charges have been added to my account--I feel sure they would have been if I hadn't coiled.

After another week, I get a form letter that says, "Regretfully, we or a unable to comply with your request at this time because please send us a copy of your bank statement [sic]." I put the bank statement in the mail.

Meanwhile, I try to figure out the source of the problem. CheckFree, the intermediary that actually transmits payments from Citibank to First USA, verifies that bath payments were made electronically. Citibank tells me the same thing, and says the problem must be on first USA's end. A customer rep at First USA has no explanation, either. "There's no glitch I'm aware of in our system," she says.

Leery of going the electronic route again, I drop my next payment in the mail on September 4. (It's net due until the 18th, but I'm not taking any chances.) By September 8--just two business days later, counting the Labor Day holiday--the payment has already been posted. But I'm still waiting to hear about my $8,000. Go figure.

Kiplinger.com: Senior reporter Joan Goldwasser will host an online discussion about credit cards the week of October 25. For a list of competitive credit card deals, go to www.kiplinger.com/spending.

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