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Credit Card Issuers Looking For Ways Around Anti-Abuse Rules

New ways of computing late fees bring in big bucks

By James Limbach
ConsumerAffairs.com

December 11, 2009

A new research report from the Center for Responsible Lending (CRL) claims the industry is "crafting new tricks and traps" to get around the new regs in order to continue hitting the nation's 80 million families with one or more credit cards with what CRL calls "arbitrary, unfair interest rate hikes and fees."

The study, "Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate," examined the practices of issuers that hold over 400 million credit card accounts and found at least eight specific industry practices that flourish despite federal efforts to halt them.

CRL says these practices make it all but impossible for the average person to determine the real cost of credit card debt, and that "the ability and eagerness of credit card issuers to exploit loopholes in the new federal rules underscores why lawmakers need to pass legislation to create the Consumer Financial Protection Agency, as proposed by the White House and now under consideration by Congress."

The eight practices highlighted in the report include the manipulation of interest rates, the padding of miscellaneous fees and a deceptive policy on late-payment fees. Use of these abusive tactics is widespread and growing, the report finds.

Late fees

Regarding late-payment fees, Dan of Campbell Hall, NY, says he's had a WaMu credit card for five years and has always paid his card down. He tells ConsumerAffairs.com that when Chase acquired WaMu last year, his interest rate shot to 29.99 percent and his account was closed. He says Chase refused to re-activate the card, citing late payments.

When asked for documentation on the late payment, Dan says, "They responded by telling me the reason my interest was raised was that I was one day late on a payment. Apparently the due date was on a Sunday and they did not post the payment until Monday. My bank account (also Chase) shows the payment made on the Sunday. I am at wits end. The only reason they did this was to gouge consumers before the new laws go into effect in February."

CRL researcher, Josh Frank, the report's author, says the Credit CARD Act that Congress passed earlier this year was "a big improvement for American families. But our research shows that industry keeps finding clever ways to get around meaningful reform, and we need a regulator focused on making financial products fair."

The report spotlights a little-known tactic, which CRL calls "pick-a-rate." In this example, a card company tells cardholders their interest rate will be pegged to the prime rate, which until now has usually meant the prime rate on the last day of the last billing cycle. But CRL's analysis of the fine print finds that a growing number of issuers have added language that allows them to pick the highest prime rate in a 90-day period -- no longer a single day.

This change can significantly raise a cardholder's cost, often without his or her knowledge. This particular practice alone costs Americans $720 million a year and, CRL predicts, could grow to $2.5 billion annually in a few years as the practice spreads.

Larger late fees

In addition, all of the top eight credit card issuers have increasingly imposed large late fees across the board for borrowers, even for smaller balances. The marketing around late fees is deceptive. Credit card issuers claim to impose late fees on a sliding scale that charges a larger flat fee for larger total balances. In fact CRL says issuers have steadily lowered the amount it takes to be considered in the highest balance category and, consequently, subject to the largest fees.

This penalty structure has undergone a fundamental shift since 2003, when a balance of $1,000 triggered a $35 late fee. Since then credit card issuers have lowered the cutoff for the balance that triggers the highest late fee, so that today a balance of $250 is assessed the same penalty fee as a $1,000 balance. The result is nine of every ten cardholders will incur the largest fee if they pay late. In addition, the average late fee today is $39, while the typical past-due amount is approximately $50.

Other practices that have become increasingly common, according to the Center, include imposing minimum finance charges; inactivity fees; fees on international transactions; fees (in addition to interest charges) on balance transfers and on cash advance fees; and variable rates that have artificially high floors.

While the Credit CARD Act of May 2009 will stop some of the worst abuses in the industry, CRL says it believes a strong Consumer Financial Protection Agency would provide common-sense rules on credit cards and could respond to abuses quickly as they surface, before they become widespread.

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