Washington, D.C. – The banking industry is pursuing aggressive strategies to increase credit card income and push consumers deeper into debt, according to a new credit card survey released today by Consumer Action (CA). CA and the Consumer Federation of America (CFA) called on Congress to approve new consumer credit card protections and urged cardholders to take steps to avoid new charges.

The CA survey of 117 cards from 74 banks, undertaken in August and September, revealed the following the aggressive pricing strategies by card issuers:

• Increased use of penalty rates. Especially in the past year, issuers have sought to increase fee income by defining stringent payment conditions which, if not met, trigger penalty rates of up to 25 percent. These conditions are as unforgiving as making one late payment or exceeding the credit limit once. Of 31 banks surveyed with penalty rate provisions, default APRs ranged from 16.25 percent to 24.95 percent.
• Increased late fees. Many banks now charge late fees of $29. On average, the 35 banks in the 1998 and an earlier 1995 CA survey increased late fees by more than two-thirds during this three-year period. In 1995, late fees at these banks averaged $12.79. By 1998, the average had risen by 71 percent to $21.82.
• Increased “over the limit” fees. These fees are typically at the same level as late fees, with many banks charging as much as $29. (These fees are charged monthly when an outstanding balance exceeds the credit limit.)
• Shortened grace periods. Most banks give cardholders 25 days from the closing of a billing cycle to make a payment without additional interest. But a number of banks have shortened this grace period to 20 days, thus increasing opportunities to assess late fees.
• Curtailed “leniency periods,” the time between the due date and when a payment can be received without incurring a late fee. Of 74 banks, 45 said they would impose late fees immediately if a cardholder’s payment was not received by the due date. In the past, many banks gave consumers from 5 to 15 extra days to pay without penalty.
• Lowered minimum payments, the portion of any outstanding balance that is due in each billing cycle. Nearly half the banks in the sample require a monthly minimum payment of only 2 percent of the outstanding balance. Repaying a $2,000 balance on a 15 percent APR card would take two years longer if the cardholder paid 2 percent each month instead of 4 percent (6.6 years vs. 4.6 years), at a cost of an additional $250 in interest.

“Banks are pulling out all the stops to increase profits from fee income,” said Ken McEldowney, CA’s executive director. “If you make a couple of late payments on a new card with an introductory rate, your annual percentage rate could jump as much as 15 percentage points,” he added.

“Banks are aggressively seeking to increase interest and fee income because they wish to reverse a decline in profit margins and believe most consumers will accept the price hikes,” said Stephen Brobeck, CFA Executive Director. “Because of a saturated market and rising debt losses, bank card profitability declined from about 4 percent in the early 1990s to about 1 percent today,” he added.

Another strategy pursued by card issuers is to increase indebtedness. They pursue this strategy through aggressive marketing of cards – e.g. more than 3 billion mail solicitations last year – and through aggressive credit extension. At present, banks have extended $2.4 trillion of card-related credit – $24,000 for each American household.

In the last congressional session, members proposed several new consumer credit card protections. For example, both Rep. John J. LaFalce (D-NY) and Rep. Joseph Kennedy (D-MA) introduced legislation that would prohibit issuers from penalizing cardholders who paid off balances in full. And, Kennedy’s bill would also limit the imposition of penalty rates and prohibit other unfair practices. The one protection that advanced – as part of Senate bankruptcy legislation – was a requirement that, on monthly statements, issuers disclose how long it would take, and what the total cost would be, to pay off the best making only he minimum payments.

The most effective strategy consumers can pursue to avoid the more than $60 billion in interest and fees they pay annually is to pay off outstanding balances promptly. Reducing the number of major cards to only one or two makes it easier to keep balances low and also to avoid fees.