Next February, the credit card reforms signed into law by President Obama earlier this year will finally take effect. Goodbye arbitrary rate hikes. Hello inactivity fees!
Credit card companies will have an easy time switching to new ways of assessing fees on their customers, according to a new report by the Center for Responsible Lending. The report documents several practices that the Credit CARD Act does not prohibit. According to CRL, it's just a matter of time before they proliferate.
"When bad products are allowed to flourish, it becomes a race to the bottom as they crowd out good products," said CRL's Kathleen Day. And switching costs make it unlikely that bank customers will go to the trouble of uprooting their accounts for another bank.
"Bankers know that you basically have to hit your customer with a 2x4 before they'll really leave, because it is such a hassle," Day said.
Of the practices described in its report, CRL highlights the "pick a rate" interest rate. Come February, fixed-rate credit cards will be truly fixed -- arbitrary hikes will be prohibited. But most credit cards feature rates that adjust according to the prime rate on a specific day within a billing cycle. With the "pick a rate" method, on the other hand, the cardholder's interest rate is determined by the highest prime rate on any given day in the previous three months, resulting in an annualized rate that CRL estimates is three-tenths of a percentage point higher, on average.
The Center reports that about one-quarter of credit card accounts feature "pick a rate" interest rates, resulting in a total extra cost to consumers of $720 million per year. "This cost could reach $2.5 billion per year if the practice becomes the industry standard," says the report, which adds that a few medium-size card issuers have long used "pick a rate" and that top issuers have just started to catch on.
The Huffington Post surveyed the eight largest credit card issuers -- JPMorgan Chase, Bank of America, Citigroup, American Express, Capitol One, Discover, Wells Fargo, and HSBC -- about the practices described in the report. Discover, Capitol One, Bank of America, and Chase provided answers; HSBC declined to comment.
Discover, Capitol One, and Chase said that they do not set their variable rates with the "pick a rate" method. Bank of America said that the "majority" of its variable rate accounts use the prime rate as it appears on the last workday of the previous month.
Other practices documented in the report:
Minimum finance charges are assessed when a consumer borrows money with a credit card but the normal finance charge falls below an arbitrary minimum. From the report:
In 2001, the minimum finance charge for 7 of the Top 8 issuers was $0.50. By 2009, most issuers charged a dollar or more as their minimum finance charge, with the highest being $2.00. Currently, they average $1.28.6 Borrowers pay more than $430 million annually as a result of minimum finance charges and that figure is rising as these charges are increased.
Chase and Bank of America said they had not increased minimum finance charges this year. A Capitol One spokeswoman said the bank "increased cash advance fees in 2008 to 3% or $10 (up from 3% or $5)."
Variable-rate floors allow adjustable interest rates to go up but never down. CRL reports that while none of the top eight issuers used rate floors five years ago, two of them currently use variable-rate floors that prevent rates from going below the rate provided when you sign up for an account.
None of the issuers that responded to Huff Post said they used variable-rate floors.
The report cites increasingly stingy penalty fee policies. "Tiered" late fee structures are designed to charge penalty fees proportionate to the size of the balance when a payment is missed. But the proportions have changed drastically. Top issuers introduced tiered late fee structures in 2002; a person with a balance over $1,200, say, would be fined $35 for missing a payment, while a person with a balance over $150 would be charged $39.
Since then, top issuers -- including Bank of America, Discover, and Capitol One -- lowered the uppermost tier to about $250. (Chase said only that it had not recently changed its fee tiers.) The top tier is applied to 87 percent of accounts.
Five credit card issuers have introduced inactivity fees or account management fees, but none of the top eight issuers have done so. However, Bloomberg reported last week that Bank of America has started a "fee test" with annual fees ranging from $29 to $99 for 1/2 a percent of consumer cardholders. Spokeswoman Betty Riess wrote, "This is a test to help us gain a better understanding of the value customers place on the card."
International transaction fees applied when a currency is exchanged:
In 2004, the majority of the Top 8 issuers did not charge an international transaction fee. In 2009 three-quarters of the top issuers charge this fee to most of their accounts. The size of the fee has also increased. In 2004, most of the issuers who charged this fee had a fee of 2%. Today most issuers charge 3%. This cannot be accounted for by inflation since it is a percentage of purchase activity, and that purchase activity level will already change to account for inflation.
Balance transfer fees for cash advances or balances transferred from one card to another:
According to data from Mintel Comperemedia, in the second quarter of 2008, 47% of balance transfer offers had no ceiling on the fee. Just a year later, 76% of balance transfer offers had no ceiling on the fee. Over that same time period, the number of balance transfer offers with no fee charged declined from 19% to 11%. At the same time, minimum fees have been rising for both cash advances and balance transfers, with the average balance transfer floor more than doubling over the last 5 years.
Bank of America increased its transaction fee from 3 percent to 4 percent over the summer, with a minimum fee of $10. A Chase spokesman said the bank had also changed its balance transfer fee earlier this year. "We disclose balance transfer fees on our offers and the fee may be as much as 5 percent," he wrote. Capitol One's balance transfer fees have remained at 3 percent. Discover reported that its balance transfer fees vary from card to card between 3 percent and 5 percent and that its cash advance rate recently switched from a fixed to a variable rate.
Bank of America said in a statement that this year the bank voluntarily decided not to raise interest rates on consumer credit cards (unless the cardholder is late twice in a year).
"We've also introduced a Basic card with one interest rate for all transactions for the life of the account and are in the process of mailing out a one-page 'clarity commitment' to our 40 million credit card customers, which is a concise summary of a cardholder's rates, fees and payment information," wrote a spokeswoman.
The Center's report, titled "Dodging Reform," is based on data from Mintel Comperemedia. Read the full report here.
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