Higher Credit Card Fees Are Bad For Bank Business, Report Finds

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.

Also on HuffPost:

13 common bank fees and policies

Loading Slideshow

• Length Of Disclosures - 111 Pages

  The average length of disclosures for checking account contracts is 111 pages.

• Minimum Amount To Open Account - $100

  The median amount required to start a checking account is $100.

• Minimum Account Balance To Waive Fee - $2,500

  The median account balance required to waive monthly checking fees is $2,500. 86 percent of banks waive monthly fees with a minimum combined account balance.

• Banks That Waive Fee With Direct Deposit - 43 Percent

  43 percent of banks waive monthly checking fees if the account has a direct deposit associated with it.

• Other Banks ATM Fees - $2

  Median non-proprietary bank ATM fees are $2 per transaction.

• Non-Sufficient Funds Fee - $35

  The median non-sufficient funds fee is $35 per item.

• Returned Check Fee - $12

  The median fee for returned checks is $12 per declined check written to the customer's account.

• Stop Payment Fee - $29

  The median stop payment fee is $29 per item to stop payment for up to six months.

• Overdraft Penalty Fee - $35

  The median overdraft penalty fee is $35 per item covered by bank advances.

• Maximum Number Of Overdraft Fees In A Day - 4

  The maximum number of overdraft penalty fees in one day for most banks is 4.

• Extended Overdraft Penalty Fee - $25

  The median extended overdraft fee is $25 for every 7 days the account is overdrawn.

• Accounts That Can Reorder Debits/Credits - 52 Percent

  52 percent of checking accounts reserve the right to post withdrawals before deposits. All banks reserve the right to reorder withdrawals.

• Dispute Resolution Restrictions - 100 Percent

  100 percent of banks restrict customers rights to settle legal disputes. 71 percent have mandatory arbitration agreements and 12 percent of banks allow customers to sue them but require that they pay any costs the bank incurs.

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Comments

[tax evader]

07:50 PM on 05/12/2012

I usually put off buying something really expensive I want until the end of the year. I purchase it with my credit card and when the statement comes...I pay the whole balance due. Isn't that hilarious? I know it pisses them off. I enjoy being a deadbeat to wall street.

[zorkas]

05:52 PM on 05/11/2012

Richrad D. Fairbank and Capital One have a better system . You pay off your credit card and they want more money . If you dont come up with the money they report you as a bad debt even though you paid them . I guess Mr. Fairbank needs the money to pay those vikings in his commercials .

[RichardinJax]

11:06 AM on 05/11/2012

"""and serves to counter claims by the financial industry that regulations hurt its ability to stay competitive."""'

I am sure outlawing murder made it more difficult fore the Mafia to "stay competitive" but it was in the public's interest to do so.

The "competitive" argument is a false one. First of all in a 'free market' the public does not owe any bank or business a competitive business position funded out of their pocket books.

That is the banks problem and the needs of the public should not be made to defer to it. Banks have a legitimate purpose and can do valuable work for the public. But it stops there. The public does not owe them a damn thing and that public has a right for its government,"of and by and for" them, not the banks to fix this mess without deference to those banks.

[Carolab]

09:34 PM on 05/10/2012

By the way, isn't this an issue for the Consumer Financial Protection Agency?

[Carolab]

09:30 PM on 05/10/2012

I have had an account with US Bank since the mid-1970s.  Suddenly on my last on-line statement I noticed a $6.00 "cancelled check fee" that recurred on the last three statements.  I called the bank and was told that this was for cancelled checks that represented debit card transactions.  It turns out I was being charged for this since November and had just noticed it.  The representative told me a notice was sent out but apparently I missed it or didn't read it.  They just slipped it by me.  Naturally I didn't expect a change like this since I had never been charged this fee before for the same service for the last several years.  I fought back and they agreed to split it with me, reimbursing me $18.00 while I paid the other half.

[Jay Gould]

04:00 PM on 05/10/2012

The Durbin Amendment didn't lead to lower retail prices, even though it reduced the card issuers' debit fee revenue by billions of dollars. Where did all this money go? Well, part of it was collected by the payment processors, but a large chunk of it (we don't yet know how big of a chunk) went to the big-box retailers. The Walmarts and Targets are now paying much less in debit transaction fees than they did in the pre-Durbin days. So where is my promised discount? For a more detailed analysis: http://blog.unibulmerchantservices.com/where-is-my-debit-discount.

[marleysghost]

03:15 PM on 05/10/2012

I finally got smart. I have given up all my cards and am having a debt mamagmemt company handle my idebtedness. 30 percent interest is usury. Bank accounts are now paying only 1 percent so it makes no sense to have a savings account either. This is all very lopsided in favor of the banks. I use a credit union, but now I am going on a cash economy because I just can't afford the fees anymore. It was a nice run, but better late than never.

[Zach4141]

01:36 PM on 05/10/2012

I work in collections for a manufacturer. I can honestly say that aggressive companies who will lend/sell to anyone end up going down. We have bought companies who went that route thinking "the more the merrier". It is just a complete waste of time to chase people who owe you and keep charging them interest and fees on top of everything. We do an extensive review process up front to make sure that potential customers will actually pay us if we extend them credit. Punishing people who owe you money by charging them more money gets you nowhere but deeper in the hole.

[Hadtoregister]

01:22 PM on 05/10/2012

The info makes sense, can help improve banking and can improve customer relations. Banks won't do it--it just too easy and makes sense.

[PragmaticStatistic]

10:14 AM on 05/10/2012

The time has come for credit cards to have their annual percentage rate maximums and minimums displayed prominently on the front of the card like the MPG on car window stickers. For example: GOOD / 10.40% MIN. / 28.80% MAX. vs. BAD / 23.4% MIN. / 33% MAX.

[apans]

10:31 AM on 05/10/2012

News Flash... No one forces you to use credit cards and when you sign up for them, there is this thing called a contract. You should read it. And, if you cannot understand it maybe that is a signal that this is a product you should not be using....

Never mind. Government, save me from myself.

[PragmaticStatistic]

11:52 AM on 05/10/2012

Most people don’t even think about, or remember, what their current credit card rate is when making a purchase. So, what harm does displaying the MIN /MAX APR on the credit card do to you unless you work for the card issuer, or are the company who cares less for your customer's financial stability than your making a sale that will indebt your customer in high interest rates that will prohibit them from making future purchases?

1) Putting the rates on the card will help keep the credit card companies honest because they will have to reissue cards each time they raise their rates. Thus, you might get fewer rate increases because the process is more difficult.

2) Putting the rate on the card will make users who have a high rate think twice about using the card.

3) As a graphic designer, I have worked on some of those credit card contracts you talk about, as well as other bank issued marketing materials which must follow a strict higher government standard as it applies to displaying interest rates and fees. Adhering to those standards keeps a lot of graphic artists employed who buy things with their credit cards that help to keep you and others employed.

So displaying MIN/MAX APRs on credit cards is good for consumers, good for employment, good for keeping rates low, and good for the economy by having consumers who are financially stable and who can afford to keep buying products.

[dananotech]

10:04 AM on 05/10/2012

(cont)

7. Tighten your belt, i.e., see what you can cut out of your budget that you really don't need. Cancel your cable TV subscription. Watch the shows for free on the internet, even if you have to wait a day or a week. Check a book out of the library and read it instead. If you have a cell phone, cancel your land line.

8. Become more energy efficient. Replace your incandescent lights with Compact Fluorescent Lamps. Replace one every month or two, so it isn't a big financial hit. Set your A/C at a couple degrees warmer. Set you heat on a couple degrees cooler. Turn out the lights when you aren't using them. Don't let the faucet just run. Take a shorter shower. If you can afford to, install solar panels and upgrade your insulation.

9. Buy locally grown food if possible. Frequent Farmers' Markets. Grow your own vegetables. You don't need much space and you can container garden even in an apartment.

10. Don't, if at all possible, ever carry a balance on your CC.

[dananotech]

10:04 AM on 05/10/2012

1. Switch your banking to a Credit Union.

2. Make a realistic budget. Include a little "mad money" that you can spend on fun stuff, etc, even if it is only $5 or $10 a month.

3. Pay with cash (debit card) whenever possible. If you use a CC, have the money set aside to pay the bill at the end of the month.

4. If you have CC debt, look at what paying a little extra will do to pay off your cards in a reasonable amount of time. Paying the minimum will mean you will pay for the next 20 years or more. Include paying off debt in your budget.

5. Don't "impulse buy" anything. If you think you really want it, put it down and walk away. Check out the prices on the internet. If you decide that you really must have it, adjust your budget to include it. Know what you are giving up to get this newest thing.

6. If you need a car, buy a good used one. New cars depreciate a lot. You can get the same car gently used for a lot less money. Buy a fuel efficient car. Gas prices are only going to go up over time.

(cont)

[authorized-user]

10:03 AM on 05/10/2012

Sooner or later, the high card fees will lead to a default.
Are the banks expecting more bailouts?

[blomeup2day]

09:55 AM on 05/10/2012

come on people...you need to use credit cards and pay the fees. This is how banks make their money and employ people. You don't want those fine people losing their jobs. Having the kids of bankers go to public schools. Those people who advocate for paying credit cards in full on time, are hurting our greatest industry. Stop the madness and allow the banks to go back to opaque banking and the ability to take their customers money for their own personal gain, the customers would just spend the money unwisely.

[lijebailey]

09:31 AM on 05/10/2012

But, defaulting customers come later. All any banker cares about is THIS quarter's numbers. The end of this quarter is all that matters to them - get that bonus and move on.

[Robbski]

09:39 AM on 05/10/2012

Bingo. Couldn't agree more. Strategic planning at these companies equates with maximizing profits over the next 90 days.