Credit Card Fees in Ferment

Credit cards are guaranteed revolving lines of credit. Each time you use credit cards to pay for a purchase, you are drawing upon a pre-approved loan. Each time you pay off the entire balance in your monthly statement, you don’t carry a balance into the next period and you don’t pay anything for finance charges. This is, in effect, an interest-free loan with your credit cards.

That makes you happy, but that is bad news for the credit card issuer. Credit card companies make money only when you pay interest and fees. Up to a point, you make your credit card issuer happy when you carry a balance so they can charge you interest. But it is something else when you are told to pay too many fees on your credit cards, such as huge over-limit fees, default fees, and so many others.

Consumer groups have tried to draw attention to various ways banks have increased their charges. The Office of Fair Trading (OFT) ordered banks last year to impose a £12 flat fee on defaults, effectively stopping the old practice of computing penalties based on interest rates higher than the standard rate.

In April, a consumers’ association complained to the OFT that credit card companies had too many methods for computing annual percentage rate (APR). The groups said at least 12 different methods were in use, and this made it virtually impossible to make realistic comparisons of the various credit cards. The group asked the OFT to prescribe a standard method of calculating APR.

To recoup their lost income on penalties, consumer groups say banks have started charging new fees. In March, media reports cited that banks had started imposing higher interest rates for cash advances. The interest-free period, which had averaged at about 55 days, was reduced, and higher fees were levied on foreign exchange transactions when credit cards were used abroad.

In May, the top UK credit card issuer said that unless customers used their credit cards more frequently, the credit card company would charge low usage fees of about £20 per year. That would be much less than the £35 per year levied in February by another credit card company on its low-volume users.

Strangely, there is also talk of imposing fees if credit card holders use their card too often. After a certain level of free transactions, you may have to pay for additional transactions.

Credit card companies have already planned to eliminate the marketing tactic that served so well in attracting new customers in past years — the zero-interest on balance transfers feature. This feature is said to have encouraged too many people to become ‘rate tarts’ as they switched from one credit card to another as soon as the introductory rate periods expired.

Some of these interest-free balance transfer deals remain but credit card issuers now impose a transfer fee of 2.5% to 3% of the amount involved in the transfer.

Until this entire furor has settled down, you may want to make some adjustments. Pay off the entire credit card balance each month so you’ll continue enjoying the interest-free period, albeit it is now shorter than before. The other thing is don’t let your credit card become dormant; use it regularly, but not too often. You can ask your credit card issuer about the optimum frequency.

Back To Financial News September 2007