It’s always Christmas time for the credit card companies, says
the Consumers Union. With annual earnings of roughly $30 billion, they
may be America’s most profitable industry. Credit card issuer
Citibank, for example, earns more profit than both Microsoft and Walmart
combined. The 300 million residents of the U.S. hold 690 million credit
cards and, by the end of 2006, will have been charging an estimated
annual 1.5 trillion dollars on their cards.
The credit card companies cleverly developed a system of interest charges
and fees to maximize their profits. Some of them, as soon as they issue
a card, charge a $60 to $100 annual membership fee. Each time a card
is used for a purchase, the merchant pays a fee of 2 to 3 percent.
The fattest cash cow for the industry, however, is the interest extracted
from those--about half of all card carriers--who do not pay their balances
in full when due. In addition, customers are being assessed hefty fees
when their payments are late, and when they exceed their credit limit
(deliberately or by mistake), and when a customer wants to make a payment
over the phone, and when a check is returned for lack of funds. Some
companies will charge late fees when they do not receive the customer’s
payment on the required date, even if the postmark proves that it was
dispatched before the due date.
To pad their income further, credit card companies usually level a
3 percent charge for cash advances, for convenience checks, and for
transactions in a foreign currency. The date chosen for converting
the foreign currency amount into a dollar amount is usually not the
day of the customer’s transaction but the day when the card company
finds it convenient to do the conversion. By that time, the conversion
rate is all too often more advantageous for the credit card company
than for the card carrier--at least in my experience.
Deregulation and the U.S. Supreme Court’s decision in Smiley
v. Citibank (1996) freed the credit card industry from government control
over the determination of its fees. When that occurred, the charges
for paying late or exceeding one’s credit limit promptly climbed
from $5 to $10 to today's $29 to $39. Only cut-throat competition between
credit card companies is likely to keep them from raising their fees
further.
To entice customers into signing a credit card contract, they may be
offered "teaser" rates (as low as zero percent) for an initial
period (such as six months). Once customers become delinquent in their
monthly payments, however, the annualized interest rate may be raised
to as high as 30 percent. This is fully permissible because the fine
print in the contract states that “We reserve the right to change
the terms (including the annual percentage rates) at any time for any
reason.” A fixed rate is fixed only until the credit grantor
gives customers at least fifteen days notice of a rate change.
In 2003, the average credit card debt of US households with at least
one card was $9,205, up from $2,966 in 1990. The Cambridge Consumer
Credit Index showed in March 2004 that 42% of America’s credit
card holders made only minimal payments or no payments at all on their
credit card balances. About 51 million households carried an average
credit card debt of nearly $12,000. By the end of June 2006, total
consumer debt stood at a record 129.3 percent of disposable income.
That totals $612 billion in total debt for those households.
A week ago, the Consumer’s Union sent me (and probably several
million other Americans) the following e-mail message: “This
holiday season, give yourself a gift as you give to others--real credit
card protections. Sign the petition calling on the new Congress to
support credit card reform!”