good credit marries into bad | Beef
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devil is in the details for interest rates, credit limits,
March 22, 2002: 4:08 PM EST
By Sarah Max, CNN/Money Staff Writer
YORK (CNN/Money) – Since Bank of America began marketing
its BankAmericard in the 1950s, the credit card has become
as much a part of American culture as fast food and football.
We use plastic to pay for everything from cappuccinos to
taxes. And we sleep better at night thinking that even if
we have little in the bank, we can always count on our high
credit limits to cushion any economic bumps in the road.
But here's a wake-up call: For many consumers, the price
of credit is steep and growing. While issuers are quick to
tease us with introductory rates and reward us for our loyalty,
they are also quick to punish anyone who doesn't play by
Fees, they're everywhere you want to be
In February alone, the average late payment fee rose 3 percent
to $29, marking the largest increase in the industry's history,
according to CardWeb.com, which tracks and publishes information
on credit cards. And a handful of issuers, including Citibank,
Discover, Fleet and MBNA now charge tardy customers up to
$35, depending on their balance.
"A lot of consumers are bumping into fees that either
didn't exist before or have been greatly increased," said
Robert McKinley, chief executive of CardWeb.com.
Even customers with the best intentions have a tough time
avoiding fees, which now account for nearly 30 percent of
issuers' income. Though many cards still charge no annual
fee, many low-interest cards and most reward cards do. "Annual
fees on frequent flyer cards range from $50 to $100," said
Linda Sherry, spokesperson for the advocacy group Consumer
who shuffle their debt from one card to the next were once
the bane of the industry, but thanks to balance-transfer
fees, their actions are just another source of revenue. Issuers
now also pad all foreign currency transactions with a two
percent commission and charge about three percent for cash
advances. And a few, including Citibank, now charge $10 "convenience" fees
for paying your bill by phone -- never mind that you're probably
saving them money by doing so.
These fees add up. Say you pay $50 a year for Citibank's
AAdvantage card, which earns miles for American Airlines.
(The gold version is $85 a year.) You miss your payment date
twice each year, for a $35 fee if your balance is over $1,000.
Hungry for miles, you also use your card to pay for big-ticket
items from time to time and go over your credit limit, a
$29 fee. Not including any interest you pay, your card could
easily cost you about $150 a year.
And for everything else, there's high interest
After peaking in 1991 at 71 percent, the percentage of cardholders
who carry a balance steadily declined to 56 percent in 2000.
(McKinley estimates that it will rise to 61 or 60 percent
for 2001.) But even as more consumers paid down their debt,
the average credit-card balance continued to climb. According
to CardWeb.com, the average January balance for all households
with at least one card was $8,367, which includes those who
pay their bills in full every month.
Separate consumers who revolve their balances from convenience
users -- those who pay their balance in full every month
-- and the numbers are even more staggering. The average
debt among revolvers is $12,000, according to Robert Manning,
a professor of humanities at the Rochester Institute of Technology
and author of Credit Card Nation.
"The fees and interest on this kind of balance add
up to $2,000 a year," Manning said. He says that penalty
rates are making it increasingly difficult for consumers
with a high balance to pay down their debt. "For a small
part of the population credit cards are a good deal, but
for every person who pays 5 percent there is someone who
pays 20 percent," said Manning. "The people who
need low rates the most can't get them."
issuers now tailor their terms to fit individual customer
profiles. Those with stellar credit qualify for the best
rates, while those with spotty credit pay a premium. In fact,
the range of interest rates paid by individuals is broader
than it's ever been, with post-teaser rates ranging from
4.75 percent to 35 percent, according to CardWeb.com.
"The industry has been steadily moving toward individual
pricing. This is why you see many tiers on the individual
pricing of a card," said McKinley.
Even if you do qualify for a low rate, you must be on your
best behavior to keep it. According to a 2001 survey by Consumer
Action, nearly 70 percent of all issuers said they would
raise a customer's rate for paying late. Some issuers have
taken this a step further and will raise rates if they see
any change in your creditworthiness, says McKinley. This
means that paying late on one credit card could also affect
your rate on an entirely different card.
“Discover, Household, Citibank and Capital One have
a very proactive approach to managing risk," said McKinley. "The
regularly pool the credit files of their customers to see
if there has been any major change."
The difference between the interest rate you signed on for
and your new penalty rate can be substantial. Say you qualify
for Capital One's no-hassle platinum card, with a fixed rate
of 8.9 percent, carry a balance of $4,000 and pay $200 monthly.
If you pay late twice in six months, your rate will go to
19.8 percent. It will take you two additional months to pay
down your debt and cost you $796, or more than twice as much,
in finance fees.
It pays to discover what you're really paying
While consumers are learning to manage new fees and capricious
interest rates, credit card issuers are making money hand
over fist. Overall, bank credit-card interest and fee income
tripled in the 1990s, according to Manning. And 2001, though
difficult for some issuers, was one of the most profitable
years for the industry, with an average 4 percent return
on assets. "Credit cards are the most profitable products
a bank can offer," said Jim Accomando, president of
Accomando Consulting. "With most bank products, return
on investment is about 1 percent."
Based on the solicitations piling up in your mailbox, you
might think that competition almost guarantees consumers
the best deal. Not so, says Manning. "The real cost
of borrowing on credit cards has doubled since deregulation
in 1980," he said, referring to the spread between the
rate issuers pay to borrow money and what they charge consumers
It seems that issuers are counting on consumers to not question
their rates or growing fees.
Accomando said customers have become too complacent. "If
every one of these customers woke up and shopped around for
the rate they deserve the industry would be hurting," he
McKinley agrees. "There has not been much resistance
from consumers," he said. "Until consumers put
up a fight, issuers will continue raising their prices."
Which is why you should not leave home without...Questioning
The first thing you should do is make sure you're not paying
more than you should for your card. If you never carry a
balance, don't pay a high annual fee for a card with a low
rate. Instead, look for a card with no annual fee or one
that offers rewards. If you do carry a balance, consider
skipping a high-rate rewards card and shopping for a basic
card with a low rate instead. You may find that what you
save in finance charges is worth more than the rewards. Try
shopping locally for a small bank or credit union. Though
you may have to forgo a high credit limit and 24-hour customer
service, you could save money in interest. "Rates are
more favorable at smaller institutions, and they're more
forgiving with fees," said Greg McBride, an analyst
The typical adult has three bank cards and four retail cards,
according to Manning. If you bring that down to one or two
cards, you'll not only save in annual fees, you'll have fewer
payments to keep track of and have a more realistic idea
of how much you owe.
"Dump the number of cards you carry in your wallet," said
Accomando, who adds that people often fail to read the fine
print on their individual store cards.
Even the most responsible cardholders can lose track of
time and get hit with a late payment. An easy way to make
sure you never pay a late fee is to have a small amount automatically
drafted from your checking account each month. You can get
an idea of how much you'll need to meet the minimum payment
by multiplying your typical bill by 2 percent. This is no
substitute for paying more than the minimum via the mail
but it will protect you if you let the due date slip by you.