US credit card companies are
imposing hidden charges and deceptive fees, according to a report
from consumer advocacy non-profit organisation the Center for
Responsible Lending (CRL).
The charges are an attempt to
circumvent consumer protection legislation enacted by Congress and
due to take effect in February which regulates abrupt interest rate
rises and late-payment fees.
Go deeper with GlobalData
The CRL study, Dodging Reform: As Some Credit
Card Abuses Are Outlawed, New Ones Proliferate, flagged-up eight
examples of card issuers exploiting legal loopholes to compensate
for lost future revenue once the CARD Act is fully in force:
• Pick-a-rate
Almost 120 million accounts may be hit by a
change that will allow issuers – when setting the variable rate on
a card – to pick the highest rate in the past three months from the
interest-rate index it tracks. Previously, issuers used the rate on
the last day of the billing cycle. The result: borrowers pay an
average interest rate that is 0.3 percentage points higher than
before while the card industry generates fees of $720 million a
year and, CRL predicts, could grow to $2.5 billion annually in a
few years as the practice spreads.
• Variable rate floors
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By GlobalDataIssuers are seeking to move cardholders into
variable-rate cards as opposed to fixed-rate cards. But borrowers
may not cash in when the rate drops as issuers are limiting how low
rates can go.
• Minimum finance charges
Consumers with any amount outstanding, even a
dime, are charged a minimum amount up to $2 (the average is $1.28).
US cardholders pay more than $430 million annually as a result of
minimum finance charges, a figure set to rise according to the
CRL.
• Compression of balance categories in tiered
late fees
The marketing around late fees is, claim the
CRL, “deceptive”. While credit card issuers claim to impose late
fees on a sliding scale that charges a larger flat fee for larger
total balances, the amount it takes to be considered in the highest
balance category and, consequently, subject to the largest fees,
has been lowered. In 2003, a balance of $1,000 triggered a $35 fee;
today a balance of only $250 means the highest late fee is due. The
result: 87 percent of cardholders pay the highest fee, up from 53
percent several years ago.
• Inactivity fees
While none of the biggest eight issuers have
yet added an inactivity fee, at least five other issuers make use
of inactivity fees or “account management fees” and the practice
appears to be expanding, with fees of anything up to $3 per
month.
• International transaction fees
More credit card issuers are hitting customers
with an international transaction fee for purchases involving a
currency exchange, and the fee is rising. Most issuers who had such
a fee charged 2 percent in 2004, but today the norm is 3
percent.
• Cash advance fees
• Balance transfer fees/ ceilings
Fees for cash advances and balance transfers
are rising while minimum charges or floor levels on these fees have
been added or raised while maximum fee levels/ceilings have
increased or been eliminated.
While conceding that the CARD Act puts in
place important basic protections for credit card customers, the
CRL contends that none of the eight practices is addressed by the
legislation; and in each case the CRL maintains that each of the
eight practices is on the increase.
The report concludes with a call for Congress
to approve the Consumer Financial Protection Agency, a new
regulatory agency dedicated to overseeing the extension of credit
and subject of a withering lobbying battle between consumer groups
and the financial services industry.
“The Federal Reserve has an opportunity to
strengthen consumer protection with new rules in 2010. It is likely
future credit card pricing methods will continue to flummox
policymakers, making tracking and enforcement an ongoing challenge
for regulators and for borrowers,” the report said.
The CRL said that consumers will struggle to
avert the countless tactics issuers continue to use, until a robust
regulatory regime is in place to curb bad practice.
And according to ratings agency Fitch, credit
card delinquencies in the US continue to hit record levels.
The rate for credit card payments more than 60
days past due soared to an all time high of 4.54 percent in
December, beating the previous record of 4.45 percent in June 2009
while charge-offs rose to10.68 percent from 10.09 percent the
previous month
