Romancing the credit-card holder

Congress is looking hard at how credit-card issuers do business. Issuers are responding with sweeter deals.

from the June 18, 2007 edition

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The credit-card industry has responded proactively because "they don't want government regulation," says Ellen Cannon of Bankrate.com. "They feel that if they show good faith, and make some changes to their practices, the government may simply go away."

But that may be increasingly harder to do. In addition to complaints, various studies, including a Government Accountability Office report issued last October, have shed light on today's higher fees. And some of the tougher credit-card practices have affected more than just fringe cardholders with poor credit ratings. They've also "hit mainstream card customers," says Robert McKinley, CEO of Cardweb.com. "That's where the backlash is coming from."

To be sure, consumer advocates say they believe the card industry is entitled to profits – which it clearly obtains. According to Mr. McKinley, pre-tax profits for the bank credit-card industry (not including store cards) last year totaled $37.5 billion. That compares with $27.8 billion in 2002. "For some banks, credit cards are the biggest profit center," he says.

But to some consumer groups, some of those profits stem from deceptive "tricks and traps," and charges that seem to some like gouging. Oft-heard complaints include: fees that pile up and trigger additional charges, such as over-the-account-limit fees; and prolonged penalties, sometimes for slight infractions of a cardholder's agreement. "[Fees for] payments received even one minute late can reach as much as $50 and send a card-holder's interest rate to 30 percent or higher," notes Tamara Draut, of the public policy group Demos, in New York.

The 2007 credit-card survey by Consumer Action, released in late May, showed that the average interest rate on cards surveyed was 14.53 percent. But if cardholders paid their bill late, their interest rate could jump to an average of 24.51 percent, as a penalty, and even reach as high as 32.24 percent. And, among banks with balance transfer fees, six of those surveyed have no caps on the fees charged.

To Curtis Arnold, founder of CardRatings.com, an advocacy group that helps people understand credit cards, the five worst credit card practices are:

•Immediate application of penalties for late payments or exceeding the card's credit limit. This sometimes occurs even if a card payment is received shortly after a specific cutoff time, such as 2 p.m., on a due date.

•The ability to raise an account's interest rate "at any time for any reason."

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