Last week, Congress continued its investigation of the credit card industry. This is becoming a tense issue for credit card companies as they defend their use of fees. Despite the public protest and scrutiny, fees are are liable and growing source of revenue for issuers during this tough economic time.
According to a February report in the Wall Street Journal, revenue from fees increased from $17.1 billion in 2006 to $18.1 billion in 2007. In 2003, the revenue from fees was $12.8 billion. That represents a 41% increase in fee revenue in just four years. During this time of lower interest rates and more defaults, fees provide a steady income for issuers.
Fees now account for 39% of the revenue for credit card issuers according to RK Hammer, a bank card advisory firm.
One fee that is expanding and receiving attention is the over the limit fee. Several years ago, it was a straightforward fee–if you went over your credit limit one month, you were charged an over the limit fee. In most cases, your card was declined if your account was over the limit when you tried to make a purchase. Now most issuers will allow you to keep charging even if you are over the limit, and they have expanded the penalty. If you exceed your credit limit, you will pay the fee and might be assessed the default rate that is over 30% for most cards.
This is a steep penalty. For example, if your card has 14% rate and you carry a $5,000 balance, you will pay approximately $700 per year in interest. If your rate is increased to 30%, you will pay $1500 per year in interest.
Banks are also expanding the debit card/checking account version of the over the limit fee–the overdraft policy. Most banks charge over $30 every time a customer writes a check for more money than exists in the account. Therefore, if you write five bad checks, you are charged $150 in overdraft fees.
Several banks also have an extended overdraft policy: if your account is in an overdraft situation for a period of time (usually six days), you face an additional one-time fee that can range from $30 to $42.
Yet another layer of overdraft fees is being discussed in the banking industry. If a customer is in an overdraft situation for an extended period of time, the customer may also be charged an additional fee for every day that the account is overdrawn.
Beginning June 1, Compass Bank, a regional bank, is charging overdrawn customers an additional $7 per day charge from day seven to day thirty.
If you don’t closely monitor your account, and your account is overdrawn, this is going to be a very costly surprise when you get your monthly statement. Even though Congress and other agencies are investigating the practices of the credit card industry and are expected to push for changes, banks and issuers defend their practices and oppose new regulation. They argue that forced changes could have unintended consequences for consumers such as more expensive credit with higher rates or that it could be more difficult for consumers to get credit.
The bank fee policies for accounts and credit cards are a bit repressive for those who are struggling to maintain their accounts and keep up with their debt payments. They are the ones who are most likely to have a problem and get penalized with a hefty fee or default rate. However the banks are saying the revenue from these higher rates and fees are keeping costs down for all other consumers. Unfortunately, times are tough for many households right now and more people may soon find themselves caught in this rate and fee trap, but have no other alternative for credit.