The Credit Card Industry has drawn significant criticism lately, as consumers have begun to focus on their cost of funds, just as institutions do. While Congress has debated and passed new legislation set to curtail these actions, it seems we haven’t seen the end of them yet.
Pew Charitable Trusts, through their “Safe Credit Cards Project” has recently found that credit card companies have continued to use practices that will soon be outlawed by laws set to take effect in February.
The study focused on the 12 largest card issuers, and the 400 of the cards they offer. In almost all cases, they found that the customer agreements allow the banks to raise interest rates on outstanding balances. Additionally, most also have penalty interest rates that can be triggered by simple oversights, being one or two payments late, or being over limit. In a creative strategy to maximize the compounding of interest charged, it seems the issuers are using FIFO accounting on the payments – that is, applying the payments to the lowest interest payments first, thereby allowing the higher interest payments to remain (and compound).
The interest rates on credit cards are borderline predatory. They can be quite misleading, and hard to understand. Adding to this already confusing fine print changing rates, and surprise increases, it is easy to see why so many consumers have grown to mistrust these firms.
Now, in fairness, the credit card companies should have the right to charge a reasonable interest rate – they assume the risk on transactions, paying the vendors for purchases the customers make. During recessions, when unemployment is rising, credit card payments are often the first bill that is delayed in payment.
“Right now, the credit card company can rewrite the contract at any time,” Nick Bourke, the author of the study said. The biggest change once the law takes effect, he said, will be that banks won’t be able to do things like change interest rates or other terms without warning the card holder.
In contrast, Pew found that the 12 largest credit unions, which have just 1 percent of the market, have lower interest rates, lower fees and less punitive policies. Most still have contracts that allow them to change the terms at will, or take other actions the law will prohibit. But even when credit unions have things like penalty rates or over limit fees, they tend to be less expensive than banks, the study said.
Perhaps this will prompt a return to community banking, rather than dealing with a distant institution that has already lost the trust of the majority of the population. While rates will still remain high compared to other sources of funds, any legislation aimed at regulating the industry will be welcome by consumers – even if it is not perfect.
