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
Page 3 of 4
•Applying payments to balances on the account with the lowest annual percentage rate (APR) instead of the highest. As Mr. Arnold explains, some cardholders use the same credit card for purchases as well as for cash advances and for taking in balances transferred from another card. Since each of these functions usually involves a separate interest rate, any payment typically applies to the balance with the lowest APR, allowing interest on higher-rate balances to mount up faster.
•Use of so-called "trailing interest." For those cards with no grace period, that's the interest charged on their outstanding balance between the cutoff date of their last statement and the date their payment is posted by the issuer. For example, say your statement cutoff date is June 1, and you've carried a balance from your last billing cycle. Although you mail in your payment promptly, it isn't received until June 10. Over those 10 days, that account has continued to accrue interest even though you paid off your balance in full. So, in your July statement you'll be charged interest on those 10 days in June.
•Lack of a cap by some card issuers on balance-transfer fees. That fee, typically 3 percent of the amount being transferred, was often limited to about $50 or $75. "But some banks have removed that cap, which can create a much larger charge," Arnold says. Thus, "instead of paying a $75 charge, consumers transferring, say, $10,000, to another card would pay a $300 fee."
While Arnold believes such tactics can amount to "gouging," the card industry sees things differently. To card issuers, customers enjoy some decided advantages with today's cards – among them, often no annual fee and, on average, lower APRs than existed 20 years ago. Moreover, credit-card lending is much more broadly available than it was years ago.
But the industry "has to be able to price for the risk" taken with what are, in effect, unsecured loans, notes Ken Clayton, managing director of card policy at the American Bankers Association. "When a consumer we lend to poses a credit risk, we want to [be able to] price that [risk] appropriately. That means higher-risk people bear higher costs, while lower-risk people – which are the majority of Americans – bear lower costs."
To Mr. Clayton, the industry is "more than willing" to work with policymakers to "address concerns without bringing unintended consequences." These could include "higher costs for consumers and reduced access to credit."
But for now, anyway, cardholders seem to be enjoying some unusual opportunities, especially while uncertainty prevails over what Washington might do.
In light of the current political climate, consumers themselves may be able to win better card terms, suggests Arnold of CardRatings.com. "If you have an interest rate you consider high and a good credit score, this would be a great time to ask your card issuer for a lower rate. While the industry is under the gun, you're more likely to get these types of concessions," he says.
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