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Catherine New

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

Posted: 05/09/2012 4:29 pm Updated: 05/10/2012 8:56 am

Credit Card Regulations

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
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  • 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.