Questioning the Quirks of Credit Cards
People are attacking banks again over their credit cards.
Consumer advocates complain that some banks apply finance charges from the date of a purchase rather than the date it’s posted to a cardholder’s account, thus getting some extra days of interest. A California state court recently ordered Wells Fargo Bank to refund $5.2 million to cardholders who were illegally overcharged for paying late or exceeding their credit limits. In Alabama, there’s even a move to tax the profits that out-of-state banks make from Alabama cardholders.
This lucrative little side venture of the banking business now handles charge volume of $188.3 billion a year, the “largest single source of profit for bank holding companies,” says David Robertson, vice president of the Nilson Report in Santa Monica, a newsletter for the credit card industry. Forty percent of that volume goes through the top 10 card issuers.
Oddly, consumers, who gladly use and abuse the credit, seem uneasy with it, always griping about fees and charges--at least those they understand. Until recently, they focused on interest rates, which now average almost 19% and can reach 22%. Banks say such rates are necessary if they are to offer relatively easy credit, and they do, marketing their cards more widely now, to less qualified people, leading in many cases to greater losses. In fact, some banks, says Robertson, have to write off more than 5% of the volume owed.
Arrangements Seem Bizarre
More basic criticisms should suggest themselves. After all these years, it still seems a bizarre system of lending money and assessing finance charges. Typically, the money advanced by the bank is lent interest-free if the consumer pays it all off when due; if he doesn’t, it becomes, retroactively, an interest-bearing loan.
The arrangements seem equally bizarre. The loan’s principal is not, as everyone thinks, the amount that was due, but (usually) the unpaid balance of that one month, plus the “average daily balance” of the next month’s new purchases. “I’ve never understood average daily balance,” says Edgar Dworsky, spokesman for Massachusetts’s Executive Office of Consumer Affairs. “Subtract this and add that and take the square root of the distance from here to Geneva.”
The minimum payment required on the “loan” may be 1/36th of what’s due, or 1/48th, or perhaps 3%--amounts that hardly encourage paying it off. And interest rates are fixed or variable, although “all rates are actually variable because even ‘fixed-rate’ cards are raised and lowered at will,” says Elgie Holstein, director of Bankcard Holders of America, a Virginia-based consumer group.
Soliciting Customers
There are even bizarre ways of soliciting new customers. They may be “pre-approved” but need re-approval when they accept the offer. They may also have to sign an agreement to abide by terms that won’t be sent until later, along with the card.
The current gripes are more limited but still provocative. Banks defend the practice of applying finance charges from the date of purchase (“transaction date”) because, having authorized the charge, “we’re liable for the purchase from the date it’s made,” a spokesman for Chase Manhattan says. Some point out that today’s technology may make transaction and posting date the same: A merchant’s receipts, turned in at day’s end, may move through the network, from the merchant’s bank to the cardholder’s bank and be posted to an account the same night.
But most banks assume several days’ difference, still no big deal to the consumer, says a spokesman for Chemical Bank in New York. At a rate of 19.8%, that’s less than $.05 per day per $100 owed, or $.25 for the “average of five days” between purchase and posting. But if half of a big bank’s million active cardholders pay that 25 cents on just one purchase a month, that’s $125,000 for the bank that month in extra revenue.
The Wells Fargo case involved about $23 million in late fees and over-limit charges assessed cardholders from July, 1982, to May, 1987. The class-action suit--one of several similar suits pending against California banks--challenged the bank’s charges for late payment ($3 to $5) and over-limit spending ($10), which under California law must reflect the bank’s costs. Actual costs were much lower, said the plaintiffs, giving the bank an illegal profit. The bank claimed that its costs actually exceeded the fees, but the jury ordered refunds of $5.2 million.
Broad Marketing
Some critics blame today’s fees and rates on the broad marketing of cards, because the losses on higher-risk accounts must boost the cost of cards to all cardholders. But lowering income thresholds isn’t necessarily dangerous given the sophistication of today’s screening, which assesses “other criteria” as well, says Mike Sczuka, Wells Fargo executive vice president, including “the length of time they’re on the credit bureau, the number of retail accounts they have, their credit lines and line utilization.”
Some have neither income nor past performance. Citibank, says Citibank spokesman Bill Ahearn in New York, has 1.5 million college student accounts, which are good risks “for deep psychological reasons: They don’t want to screw up and ruin their credit histories.”
Access to Credit
There could be some question whether a person should have his own credit before he has his own money, but no one asks it. A basic principle is that credit cards are egalitarian, says Robertson, which means “giving everyone access to an unsecured line of credit.”
Banks have at their hands a simple way to head off the questions that are asked--obscuring their fees. Instead of making the fee for exceeding a credit limit of $10, for example, they could use an incomprehensible formula--perhaps an extra 0.02% of the amount by which the overcharge exceeds the average of 12 months’ purchases divided by 27.
Consumers, too, have a simple solution to all credit card charges. They can use fewer cards and buy only what they can pay for at the end of a month or two.
