Credit Card Fees

With regulation threatening their current business model, credit card companies are responding with new fees, Sandra Block reports for USA Today.

credit card changesStarting next year, Bank of America will charge a small number of customers an annual fee, ranging from $29 to $99. The bank has characterized the fee as experimental. But card holders who have never carried a balance or paid late fees could be among those affected. Citigroup, meanwhile, has started charging annual fees to card holders who don’t put more than a specific amount on their cards, typically $2,400 a year. Other banks are charging inactivity fees if customers don’t use their credit cards during a specific period of time. You heard that right: You could be spanked for staying out of debt.

These fees are the credit card industry’s response to credit card legislation that will, among other things, restrict credit card issuers’ ability to raise interest rates on existing balances. Credit card issuers are looking for ways to raise income before the new rules take effect in February. During the first quarter, 27% of credit card offers included annual fees, up from 18% a year earlier, according to Synovate Mail Monitor, a credit card direct-mail tracking service.

Curtis Arnold, founder of CardRatings.com, says he expected credit card issuers to raise annual fees after the legislation was enacted. What he didn’t expect, he says, “was that good customers were going to be hit.”

This was entirely predictable.  Credit cards aren’t a public service but rather a means of generating profits for businesses.  If the government is going to close off revenue streams, card issuers are naturally going to look for others.

To be sure, I find some of the practices common in the industry to be unconscionable.  Aside from the ability to retroactively change the APR on existing balances, the one that irritates me most is that, if a customer does not pay the balance in full by the due date, the “float” ends on subsequent purchases.  That means customers are paying interest from the moment of purchase.  It’s not widely understood and can come as quite a surprise.

But card issuers have to make money in a hyper-competitive environment.  There’s a limit to how much they can charge merchants before they stop accepting cards (which is why, for example, many merchants won’t take American Express, which charges higher-than-standard rates).  Only customers with very low IQs or very low credit scores pay annual fees.  So, unless you’re carrying a revolving debt and paying the usurious interest rates, you’re not a particularly valuable customer.

Am I a “good customer”?  I’ve used credit cards for more than two decades and have always been a convenience user.  I’ve never intentionally carried a balance on any of my cards and tend to charge everything possible, even very small purchases, finding it faster and more convenient than paying with cash and accumulating lots of spare change.  Further, I refuse to pay annual fees. So, the only way credit card companies make money off of me is from the fees they charge merchants.   Indeed, since the two cards I use most generate points that translate into airline miles and hotel stays, they’re actually paying me to use the cards.

Because I charge a ridiculous amount each month, I likely generate enough in merchant fee payments to be worthwhile.  But they’d almost certainly prefer someone who was carrying several thousand dollars in debt and making the minimum payment each month.

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James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. just me says:

    The other practice that bothers me-although isn’t necessarily hugely wrong is the less than 30 day period. Oh and I do think all the offers in the mail don’t really help matters.

    I found it easier to lose track of the credit card due dates, when they were every 20 days. I think this coupled with the “your payment has to be here by the due date, or we have a late charge and raise your interest rate” seems designed more to trap people into paying late.

    That said, I haven’t used a real credit card in years-we mostly have moved to the philosophy that if we don’t have the cash to pay for it, we don’t need it yet. The real credit cards are for emergency use only-and outside of the knowledge that we could be in a position where cash isn’t possible, we probably wouldn’t even have the cards we do have.

    I haven’t gotten anything in the mail at the moment changing the terms of service, but I am going to keep an eye out.

    Personally I am not a fan of how credit card companies work, but nobody forces anyone to sign up and run up debt either-the real problem is how people spend today what they won’t even have tomorrow, and probably won’t have until sometime next year, and they keep buying and keep buying.

    The companies could certainly have some better practices, but I don’t think making a credit card company stop some of them will make people spend their money with more responsibility.

  2. Dantheman says:

    James,

    “So, the only way credit card companies make money off of me is from the fees they charge merchants.”

    And since they pay the merchants 2-3% less than the purchase price, while you pay the purchase price in full within 30-60 days (depending upon when in the billing cycle you charged the item), they are earning no less than 12% per year on the amounts you charge, and possibly as much as 36%. If they cannot make money on that (especially in these days of low interest rates), I have very little sympathy for them.

  3. James Joyner says:

    they are earning no less than 12% per year on the amounts you charge, and possibly as much as 36%

    You’re presuming that there’s an infinite supply of customers paying interest, I presume? Otherwise, I don’t see how that’s a given.

  4. odograph says:

    James, get some sleep and rewrite this one:

    This was entirely predictable. Credit cards aren’t a public service but rather a means of generating profits for businesses. If the government is going to close off revenue streams, card issuers are naturally going to look for others.

    My credit cards are not free, as a “public service”, because the government made them so.

    They are free because card providers and merchants agreed to split costs, as an inducement for my shopping.

    I am actually very confident that I will continue to have free cards, because I (with my market power as consumer) can continue to make vendors “eat it.”

    Yes, part of that is in the prices we pay from those vendors already, but part is NOT in those prices because the whole credit card system is ALSO based on the interest charged to less prudent buyers.

    Costs are split between vendors paying for a service, and borrowers paying interest. That’s the way it should be.

  5. James Joyner says:

    Odo,

    All of that is covered in the post. Merchant fees are a part of how issuers make money, as is interest. As are numerous other less obvious fees. When government regulates the latter out of existence, others will naturally replace them.

  6. PD Shaw says:

    Yes, it was predictable that “good customers” (whatever that means) would be hit with higher credit costs. Steve Verdon posted on it here before the law was signed. I believe Dave Schuler commented on it at his place as well.

    Credit card companies have gotten hitten by higher than average defaults. Congress has moved to protect higher-risk credit card users. The obvious move is to try to get more money out of lower-risk users, but this group has alternatives to credit card use. So we’re back to charging those who find themselves in a difficult spot right now.

  7. Alex Knapp says:

    Further, I refuse to pay annual fees.

    Looks like the only way you’ll be able to avoid that is to close your accounts. Which means that your credit score will take a hit…

  8. odograph says:

    All of that is covered in the post. Merchant fees are a part of how issuers make money, as is interest. As are numerous other less obvious fees. When government regulates the latter out of existence, others will naturally replace them.

    What, I should believe this naked assertion because you are an expert in internal cost structures and competitive pressures in the credit card business?

    All you did there James was predict the future. You certainly have no reasonable proof. I mean, to name one counter-factor, many of us have debit cards in our wallets along with our credit cards. The debit cards are free, as an inducement to secure our saving or brokerage accounts. If credit cards “all” charge fees, we would migrate to debits. Are they really ready to see us go?

    LOL, they want us zero-balance folk on-line just in case we decide to splurge this Christmas.

    (I also recognize that you predicted a future convenient to a particular political rant.)

  9. James Joyner says:

    All you did there James was predict the future. You certainly have no reasonable proof.

    Actually, the linked article is proof: Major companies are already doing this.

    I’m not claiming particular expertise in high finance – just an understanding of how the world works. It’s just Politics 101: Regulation begets steps to achieve the same outcome via an enregulated route. See, for example, the history of campaign finance since 1974.

  10. odograph says:

    Looks like the only way you’ll be able to avoid that is to close your accounts. Which means that your credit score will take a hit…

    When one is young a credit score is important, but it was always a little bit of a game. Vendors somehow got people borrowing to prove they could borrow. People who did that with prudence were ok, but many slipped over. The rules in fact might not encourage prudence in all cases.

    Consider the absurdity that closing a zero-balance card would reduce your credit rating.

  11. odograph says:

    Actually, the linked article is proof: Major companies are already doing this.

    No they do not.

    They say some companies are experimenting with fees. The DO NOT say they’ll win this poker game.

  12. James Joyner says:

    Looks like the only way you’ll be able to avoid [annual fees] is to close your accounts.

    My guess is that no annual fee accounts will remain available but only to customers who charge a lot of money. Which, really, makes perfect sense.

    If they all go away, I’ll do cost-benefit analysis. If the fee is decidedly less than what I get in free airline travel and hotel stays, I’ll reluctantly pay. Otherwise, I’ll just shift to using debit cards as my convenience mechanism. The float is no longer my major motivation — just points and avoiding the hassle of keeping lots of cash on hand.

  13. odograph says:

    BTW James, I challenge you to work the current credit card charge-off rate into your simple parable of how proposed regulation might mean fees for everyone.

  14. odograph says:

    Since you are guessing, James, here is a link:

    https://www.starbucks.com/card/programs/duetto

    Let’s come back in a year and see if Starbucks and Chase have stopped eating the annual fee on that one, ok?

  15. Dantheman says:

    James,

    “You’re presuming that there’s an infinite supply of customers paying interest, I presume?”

    No, that’s what they make on the amount you charge. Using the least favorable set of circumstances, they are getting 2% (the minimum difference between what they pay the merchant and what you pay them) for advancing the money for 60 days (if you charge everything the day after your cycle starts). If they earn 2% for lending money for 1/6th of a year, they are earning 12% per year. If they get more from the merchant, or your charges are later in the cycle, they earn a higher percentage.

  16. odograph says:

    If they earn 2% for lending money for 1/6th of a year, they are earning 12% per year. If they get more from the merchant, or your charges are later in the cycle, they earn a higher percentage.

    That would be a beautiful business, wouldn’t it?

    Unfortunately the charge-off rate complicates things:

    Along with steadily paying down their debts, a growing number of people are also apparently having a little bit less trouble making their consumer credit payments each month.

    According to Moody’s Investor’s Service, the charge-off rate fell to 10.52 percent in July, down from 10.76 percent in June. Charge-offs occur when a credit card company gives up on ever receiving payment for an outstanding balance. However, the consumer is still on the hook for the debt, which will weigh down his or her credit score.

    Unbelievable that credit card companies put themselves in such a position. I guess it was a result of pursuing high-profit customers, even if they were imprudent customers, in good times. In harder times, those high-profit customers turned over.

  17. PD Shaw says:

    odograph, I believe part of the write-offs are negotiated with the consumer in order to close the account. I assume the thinking is this: We have someone that has paid usurious rates for years, and credit card delinquencies are set to rise since they track the unemployment rate. If we can get these people to pay 50% to close their account, we’ll be ahead.

    I assume the card companies are getting hit hardest by middle class users, for whom delinquency wasn’t easily predicted, nor offset by past fees and interest rates.

  18. odograph says:

    Yes PD, I tend to think of it in terms of fresh purchases, but you are right. If they’ve managed to keep someone on top-rate for a year or two, the credit card company’s costs are long since paid. They are in the gravy.

  19. odograph says:

    Hmm. “Average consumer credit card rate, overall market: 15.39%” I wonder how high they boost the folk approaching charge-off. At 15% they’d have to carry someone a while to recoup.

  20. Dantheman says:

    odo,

    “That would be a beautiful business, wouldn’t it?

    Unfortunately the charge-off rate complicates things”

    There is some truth there (although limited as PD noted, and note that the interest is only a part of their charges to delinquent consumers). But your objection effectively shows that James (as a consumer that they never have to charge anything off with) is subsidizing those who do ultimately have charge-offs. And yet, they want to drive James away, and get more of the consumers who will have charge-offs.

  21. odograph says:

    Dan, if I were running a credit card company I might ask for information about my customers. How stable are the zero-balance folks, and how often do they migrate to balance carrying (and vis-versa).

    If the two groups are relatively stable, we can consider the as two parallel businesses. Does the zero-balance business pay on merchant fees. Your 12% math, especially now when costs of funds are so low, implies that it should work.

  22. Dave Schuler says:

    I believe Dave Schuler commented on it at his place as well.

    Yep. And a frequent commenter at my place noted that he’d just received a notice from his credit card company informing him that his new interest rate would be over 27%.

  23. Dantheman says:

    odo,

    “Dan, if I were running a credit card company I might ask for information about my customers. How stable are the zero-balance folks, and how often do they migrate to balance carrying (and vis-versa).”

    They do already (using data from the credit reporting firms for how you are paying your bills, analyzing spending patterns, etc.). They have models to let them predict who is going to go from zero-balance to balance carrying. I remember a few months ago, Megan McArdle had a series of posts on this, starting with complaints that if suddenly a person started shopping at Wal-Mart, they were more likely to be in financial trouble, and therefore cut their credit limit and raised interest rates with no notice to the customer.

  24. Franklin says:

    Looks like the only way you’ll be able to avoid that is to close your accounts. Which means that your credit score will take a hit…

    BFD. My score was in the 800s last time I checked. If they don’t want a customer who will never default, so be it. No skin off my back.

    Anyway, how much effort does it take to shuffle money around; I have very little sympathy for them. The banks just waste their time and money buying other banks and cooking up new barely legal scams. Boo hoo.

  25. Steve Verdon says:

    I think this will not go the way everyone is thinking. Yes some will pay annual fees or get interest rate hikes. But the idea that the credit card companies can do whatever they like is belied by this comment from James,

    My guess is that no annual fee accounts will remain available but only to customers who charge a lot of money. Which, really, makes perfect sense.

    If they all go away, I’ll do cost-benefit analysis. If the fee is decidedly less than what I get in free airline travel and hotel stays, I’ll reluctantly pay. Otherwise, I’ll just shift to using debit cards as my convenience mechanism. The float is no longer my major motivation — just points and avoiding the hassle of keeping lots of cash on hand.

    The people who will likely be hit hardest will be those with less than good credit ratings who can’t get credit at all now. But I’m sure the authoritarians here are fine with that as they know what is best for these people.

    I remember a few months ago, Megan McArdle had a series of posts on this, starting with complaints that if suddenly a person started shopping at Wal-Mart, they were more likely to be in financial trouble, and therefore cut their credit limit and raised interest rates with no notice to the customer.

    Or a Wal-Mart just opened up in the neighborhood. I hope they try to take that into account. But even if they don’t you do as James’ has suggested do a cost-benefit analysis and ditch cards if you need too.

  26. Drew says:

    Hard to get too excited here. This is a very, very competitive market. The tug of war between merchant, card issuer and consumer will sort itself out pretty quickly.

    I do have to say the hand wringing about fees and usurious rates is a bit odd. As many commentators noted, the convenience issue is their motivator. If the “cost of convenience” becomes too high then I suspect the number of cards held will be minimized and the the card issuers will respond accordingly. And there is still the old reliable check.

    As for the chronic balance carriers……no sympathy. None. What happened to pay as you go? Don’t like the rates? Don’t carry the balance.

  27. Scott Swank says:

    I don’t think that the point of the legislation was to keep credit card companies from making money, but rather to force them to make money in a clear, intelligible manner. This card has a rate of X% and an annual fee of $Y, perhaps with rewards program Z. Now I can compare it with another card and make an informed decision. This is how markets work.

    Opaque fee structures and unpredictable, varying interest rates make for what’s known as “information asymmetry”. That is not a situation where markets work very well.

  28. James Joyner says:

    Opaque fee structures and unpredictable, varying interest rates make for what’s known as “information asymmetry”. That is not a situation where markets work very well.

    I agree and support this aspect of the legislation, at least in principle. I’m just saying this is the expected reaction.

    And there are quite a few “markets” where hidden fees and lack of transparency are the norm. Cell phone plans are the most obvious. But try, for example, comparing mattress prices across stores. No two stores carry the same model!

  29. Alex Knapp says:

    As for the chronic balance carriers……no sympathy. None. What happened to pay as you go? Don’t like the rates? Don’t carry the balance.

    You’re right, because nobody ever is forced to borrow money because of job loss, medical emergencies, etc….

  30. gustopher says:

    If they all go away, I’ll do cost-benefit analysis. If the fee is decidedly less than what I get in free airline travel and hotel stays, I’ll reluctantly pay. Otherwise, I’ll just shift to using debit cards as my convenience mechanism.

    There is one very significant benefit that credit cards have over debit cards — if someone steals your number, they can only take the credit card company’s money, not yours.

    The debit card is linked to your money. You’re likely only liable for the first $50 of fraudulent transactions, but while the matter is being cleared up, you’re out the dough, which can affect your ability to pay rent, mortgage, car payments, upkeep on the mistress, whatever. And, if you don’t notice immediately, checks can bounce and you’ll rack up those fees as well.

    How long will it take the bank to replace the money in your account? I’d rather not find out, but I would worry that it.

    With a credit card, you have none of those additional problems.

  31. gustopher says:

    As for the chronic balance carriers……no sympathy. None. What happened to pay as you go? Don’t like the rates? Don’t carry the balance.

    You’re right, because nobody ever is forced to borrow money because of job loss, medical emergencies, etc….

    I suspect the key word was “chronic”. A lot of people just don’t live within their means.

  32. Drew says:

    “You’re right, because nobody ever is forced to borrow money because of job loss, medical emergencies, etc….”

    Thank you, I know I’m right.

    Setting aside that the vast majority of people with credit card problems do not suffer the issues you cite, making your position ludicrous………

    I once didn’t have the proverbial pot to piss in. I managed my affairs accordingly, certainly not such that if catastrophic events occurred I was put into the cross hairs of 15% metered money. That’s called “mismanagement,” your apparent sympathy with such personal finance strategies aside.

    Sorry, Alex, no sale here. The overwhelming credit card debt story is people living beyond their means.

    I have no such debt concerns these days, and know from personal experience that my philosophy, and my current personal financial position, dovetail.

    To those who disagree, I wish you well………and hope interest deductions remain a part of the tax code.

  33. Franklin says:

    The people who will likely be hit hardest will be those with less than good credit ratings who can’t get credit at all now.

    The people getting hit the hardest right now are pretty much the same people, no?

  34. floyd says:

    A sane nation has usury laws.

  35. odograph says:

    This is an old thread, but here is some new … news that sort of confirms my suspicions about charge-off rate and profitability … for CITI at least:

    Citibank’s average yield year-to-date (consumer and plastic) was about 12%. But they’re suffering 10% defaults, making their true margin about 2%. That’s still a positive number…. if it’s accurate.

    Much more strange and ugly news here:

    http://globaleconomicanalysis.blogspot.com/2009/10/citigroups-hail-mary-pass-how-to-know.html