Revealing the Hidden Cost Of Credit Cards

By Michelle Singletary
Sunday, May 24, 2009

Credit card users who crow that they're seldom charged interest on purchases because they pay their bills on time may not be able to crow much longer. President Obama is about to sign into law new restrictions on the credit card industry that lenders say may lead to the return of widespread annual fees.

Perhaps that's how it should be.

Wait, wait, hold your ire! Don't write me a nasty letter or e-mail just yet. Hear me out.

I know many of you feel entitled to use a credit card without any cost because you diligently and responsibly pay off the bill before the due date. But did you ever stop to think what that is?

You probably never considered that the credit pushers made your access to "free" money possible by gouging the less fortunate with hideous penalty fees and wicked double-digit interest rates. Effectively, the most financially vulnerable consumers have subsidized the low interest rates and rewards programs that the more financially secure enjoy.

I know what some of you may be thinking: "Good for me; too bad for them. That's how capitalism works."

Right you are. That is how capitalism works. And at times it's a selfish system.

We live in a society where many people who do well can't sympathize with those who don't. We've created a culture in which people live by "I pulled myself up by my own bootstraps" or "I got mine; it's up to you to get yours."

The recent push in Congress to halt some of the industry's most egregious practices was aimed at helping less-fortunate consumers buried under credit card debt. Certainly many lower- and middle-income people irresponsibly racked up unnecessary charges, but others resorted to credit to pay for medical expenses because they lacked health insurance. They were using credit to buy groceries or make needed car repairs so they could get to work.

Demos, a nonpartisan public policy research and advocacy group, took a look at which credit card users were the worst hit by credit card practices. In a report called "The Winners and Losers of Credit Card Deregulation," the organization pointed out that low-income and lower-middle-

income cardholders were about five times more likely than the wealthiest cardholders to pay more than 20 percent interest.

The Demos report separated credit card users into four categories:

-- Nonusers, who have credit cards but do not use them.

-- Convenience users, who accumulate balances each month but pay them in full without incurring interest charges or fees.

-- Revolvers, who accumulate balances each month without paying in full and as a result incur monthly interest charges.

-- Late payers, who miss deadlines or skip payments altogether, accumulating balances and incurring high interest charges and late fees.

The revolvers and late payers are the credit card industry's most lucrative customers. While I don't necessarily disagree with the idea that lenders should be allowed to charge more to customers who are higher credit risks, many of the fees and high interest rates imposed on such borrowers are predatory and unfairly deepen people's debts.

Now that Congress has sent Obama a bill intended to rein in unfair credit card practices, it won't be long before the industry responds with new or old ways to make up for lost revenue.

Already the language from the lenders is pitting so-called "good" credit card users against "riskier" ones.

"Those who have managed their credit well and currently have very good credit card deals will find that card companies are limited in their ability to distinguish between them and those that have credit problems," Edward L. Yingling, president and chief executive of the American Bankers Association, said in a brief written statement after the legislation passed. "The result will be some subsidy from those that manage their credit well to those that have problems, affecting negatively the terms the former will receive."

Yingling added that the "new rules will limit the ability of card companies to price according to risk."

No, they won't. There's nothing in the law to prevent the companies from charging higher interest rates to irresponsible or riskier borrowers. What the industry is lamenting is that they won't be able to continue gouging lower- to middle-income cardholders. It means these people won't be subsidizing convenience users.

This change won't be easy for some, as evident from the following comment I received from a reader during a recent online discussion. The person wrote: "I am fortunate enough to be able to pay off my credit card bills in full every month and on time. I am concerned that, with the new legislation, my American Express annual fees will go up and I will get asked to pay annual fees on the MasterCard and Visa, both of which are now free."

No, those cards were never free.

-- By mail: Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

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