Credit Cards' Hidden Costs
Thursday, October 12, 2006
Credit card companies don't clearly disclose penalties, variable interest rates and other fees, leaving consumers confused about the true cost of using plastic to pay for everyday transactions.
That's the conclusion of a new congressional study that looked at the lending agreements and marketing brochures of the six largest U.S. credit card issuers, which account for 80 percent of the nation's outstanding credit card debt: Citibank; Chase Bank USA; Bank of America; MBNA America, which is now part of Bank of America; Capital One Bank; and Discover Financial Services.
The report by the Government Accountability Office found many consumers do not understand that if a borrower is late on one payment, companies will not only impose a late fee, which can reach nearly $40, almost triple that of a decade ago, but also significantly raise the interest rate on past and future charges, possibly to as high as 30 percent.
Half of the companies surveyed charge interest on debt consumers have already paid. For example, if a consumer charges $500 and pays off $450 before the billing cycle ends, these companies will charge monthly interest for the entire $500, not just the remaining $50.
The GAO, the research agency of Congress, said it could not determine the extent to which penalty fees and interest rates have contributed to consumer bankruptcies, but did find anecdotal evidence from a few court cases where "sizable penalty charges" contributed to individuals' problems.
The report is the most comprehensive recent study of credit card fees and pricing practices, congressional staff and industry executives said. U.S. consumers now have 690 million credit cards, or about six for every household, and the amount charged each year on those cards has grown to $1.8 trillion, up from $69 billion 25 years ago. The study concluded that regulations have not kept up with changes in industry practice.
Sen. Carl M. Levin (D-Mich.), who requested the study, said it shows not only that disclosures are inadequate, but that major credit card companies often engage in unfair and deceptive practices that need to be stopped.
Travis Plunkett of the Consumer Federation of America agreed. "More disclosure isn't the answer. Better disclosure is what's needed," he said. "But some things should just be stopped. Whacking someone with an unfair interest rate or fee is just not fair, under any circumstances, even if you tell them in advance."
The Federal Reserve Board, a major bank regulator, is reviewing how to revamp disclosure rules to make them clearer, and a spokesman confirmed yesterday that the agency is also reviewing some practices that Levin and other say are abusive.
The GAO found some changes in industry practice that have benefited consumers. More than half of credit card users are charged a lower interest rate than they were 10 to 15 years ago and most have not been charged a penalty fee for being late or over their limit.
Before 1990 most cards carried a fixed rate of about 20 percent, had few fees and were offered only to people with stellar credit histories. The study found that charges today vary widely. Industry officials say that the range of charges allows them to offer services to higher-risk people who 10 years ago could not get a credit card, and allows them to lower costs for people with better credit histories.
The study found that all of those changes are not clearly spelled out for consumers. While half of American adults read at or below an eighth-grade level, most disclosures were written at a high school level. It also found that less important information is clearly displayed, while more important information, such as what would trigger a hike in interest rates, is harder to find.
The GAO recommends that federal regulators force the credit card industry to put key information in easy-to-understand English and display it prominently in easy-to-read type.
Ed Yingling, head of the American Bankers Association, whose ABA members issue nearly all the nation's credit cards, agrees. "As the complexity of the product has grown the disclosures have not kept pace. They are written by lawyers and are too legalistic and we need to have an approach that looks at it from the point of view of the consumers," he said.
Citibank, Chase and Bank of America referred calls about the report to the American Bankers Association. Capital One and Discover could not be reached for comment.