Outrageous credit card fees are not only bad for consumers; they're actually bad for business.
That's the somewhat surprising conclusion of a new report from the Center for Responsible Lending.
Although the nonpartisan nonprofit's report looks back at predatory practices that have largely ended, it offers more argument for stronger consumer protections and serves to counter claims by the financial industry that regulations hurt its ability to stay competitive.
"That same theme comes up [within the financial industry] that when you protect consumers, you harm the bottom line of banks," Joshua Frank, senior researcher at the center and author of the report, told The Huffington Post. "We see that regulating industry can actually make the system more stable."
The report found that credit card issuers that marketed aggressively and obscured pricing took double the charge-offs during the recession that companies without those practices took. In other words, Frank said, "When consumers are duped and are taken by surprise by costs and fees, they are more likely to default."
Anyone who has struggled to pay off a mounting credit card bill won't be surprised by these findings. However, the report undercuts an argument often put forward by banks and other credit card issuers that higher fees offset the risk of lending money to borrowers with shaky credit. Instead, the higher, hidden fees increased the risk that borrowers would default.
The findings of the report also have broader implications for all financial services, including prepaid debit cards, which are essentially unregulated. Even though prepaid cards do not involve credit, they have been criticized for the lack of industry standards on fee transparency. Prepaid debit cards function much like debit cards associated with checking accounts: Consumers can load them with money in advance of spending.
The report considered 23 marketing and pricing practices at the top 100 card issuers from 2006 to 2010, including extremely short grace periods between a statement being issued and a bill being due, and short teaser periods that acted as a kind of bait-and-switch for consumers hoping to lock in low rates. The federal CARD Act, implemented in 2010, has put an end to many such practices.
But not all.
Frank pointed out, for instance, that a card issuer can still raise the interest rate on a customer's future purchases at any point. The issuer must notify the card holder that the rate is rising, but it doesn't have to give any specific reason for the increase.