The 31% Credit-Card Trap

I recently had two late payments on one of my credit cards. My APR was raised from 15.98% to 31%. How long will this high rate last? Also, the interest rate on another one of my cards increased, too, even though I always paid that bill on time. Can they do that? -- L.P., Cambridge, Mass.

You bet they can. Your issuer is one of many credit-card companies that exact a high price from customers who miss their deadlines. Issuers have been hiking rates, often beyond 30%, and charging late-payment fees as high as $39, reports a recent study by the Government Accountability Office. Some Citibank and Chase cards, for example, can raise their rates as high as 32% if you miss a payment.

And you've been caught in another credit-card trap: Even if your record is spotless, issuers may jack up your interest once you've paid late on another card. They may also apply this punitive "universal default" rate if your credit score drops for some other reason. Some Citibank and Chase cards can change their rates and terms based on the number of accounts a cardholder has and the balances on those accounts.

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Read your card agreement. Wachovia, for example, automatically lowers your rate after you make four on-time payments; Capital One requires 12 on-time payments. But you may still end up paying more than your original rate.

It pays to pick up the phone and ask the issuer to reduce your interest. "Let the bank know that it's going to lose a customer if it doesn't lower the rate," says Scott Bilker, founder of DebtSmart.com and author of Talk Your Way Out of Credit Card Debt. "You have a 50-50 shot." And if the first answer is no, try again a few days later. "Sometimes it's a matter of catching the right person at the right time," says Gerri Detweiler, author of The Ultimate Credit Handbook.

If your bank is adamant, transfer your balance to another card. You may not qualify for the best rates, but you should be able to beat 31%. Then pay off the balance.

Stocks for kids

I have two kids, ages 11 and 9. They have savings accounts for money accumulated from allowances, but I want them to own stocks or mutual funds so they can see how money grows through investing. I'm looking for investments that don't require a lot of money. -- Jasper Short, Chesapeake, Va.

You're a great dad. It's hard to imagine a better gift than teaching your kids about investing and the power of compounding.

Speaking of families and investing, consider the Hodges Fund, which is run by a father-and-son team and lets customers start with as little as $250. The fund (symbol HDPMX; 866-811-0224), which invests in companies of any size with above-average growth prospects, has been the top performer in its peer group over the past five years, with an annualized return to November 1 of 42.2%.

A good choice if you'd prefer a less-risky investment is Homestead Value (HOVLX; 800-258-3030; see Thrills Without Spills). It returned an annualized 10% over the past decade. A more adventurous choice is Excelsior Value & Restructuring (UMBIX; 800-446-1012). The fund, which gained an average of 14% per year over the past decade, invests in companies that are restructuring or that are in industries undergoing consolidation. Homestead and Excelsior each require $500 to start.

Individual stocks are riskier than diversified mutual funds. But hundreds of companies that sponsor dividend-reinvestment plans allow investors to buy initial shares directly from the company. Two promising prospects with kid appeal are Hershey (HSY; 800-842-7629; $250 minimum investment or $25 a month through automatic investment) and Nike (NKE; 800-401-3439; $500 minimum or $50 through automatic investment).

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Low-minimum savings

I want to open a 529 college-savings account for my year-old son. I checked into a reputable investment firm, and the minimum to open an account is $2,500. I am a single mother and don't have that much on hand. Can you point me in another direction? -- R.E., Madera, Cal.

Such a high minimum is very unusual. Most plans have investment minimums of $15 to $250, and Utah's plan has no minimum at all.

A few states do have higher minimums, but you can avoid those by staying close to home. California's Golden State ScholarShare 529 plan lets you get started with as little as $25, or $15 with automatic deductions from your paycheck. It's usually best to stick with your own state's plan if the state offers residents an income-tax deduction for their contributions. About half the states offer such a deduction; unfortunately, California isn't one of them.

Because that perk isn't available to you, you should also consider Iowa's 529 plan, which lets you invest as little as $25 ($15 with payroll deduction) and offers a number of low-fee mutual funds from Vanguard as investment options. You don't need to live in Iowa to open a 529 account there, and you can use the money at any college.

Update 401(k) limits

I know that the 401(k) contribution limit in 2007 for people age 50 and younger is $15,500. However, my company sets a ceiling based on a percentage of my income, which makes my limit lower than $15,500. Can the company do this? -- Name withheld, Boston

Your company may be making a big mistake. And even if it isn't, there are ways around percentage limits.

First ask your employer the reason for the ceiling. The most common explanation is "nondiscrimination rules." By law, companies can't have a situation in which highly compensated employees (those earning more than $100,000) contribute a lot more to their 401(k) plans than other workers do. So some employers set a percentage-of-income limit.

But your company can get around that by encouraging lower-income employees to contribute. The pension law enacted in 2006 makes it easier for companies to enroll employees automatically in a 401(k), which can satisfy nondiscrimination rules without limiting employee contributions, says Bob Scharin, senior tax analyst with Thomson Tax & Accounting.

It's also possible that your employer may be following outdated rules. Before 2001, an employee's contributions to the 401(k) plan plus the employer match couldn't total more than 25% of a worker's income. So some employers capped their employee contributions to make sure that they fell within those limits, says Rick Meigs, president of 401khelpcenter.com.

But in 2001, the ceiling was increased from 25% to 100%. As a result, "plan limits were no longer necessary," says Meigs, "but many plans never removed them." If that's the case, ask if the plan documents can be updated to eliminate the cutoff.

My thanks to Katy Marquardt for her help this month.