Contact: Malcolm Bush or Tom Feltner
Card Terms and Conditions Have a Highly Deceptive Effect but Credit
Union Issued Cards are Fairer than Bank Issued Cards, Says New
Woodstock Institute Report
Chicago-based Woodstock Institute has just released a report describing
the fees, rates, and terms of the largest credit card providers in the
U.S. titled “Blindfolded Into Debt: A Comparison of Credit Card Costs
and Conditions at Banks and Credit Union.” The report documents the
highly confusing terms and conditions now used in the credit card
industry. It suggests that the deceptive effect of these complexities
massively raises the cost of using credit cards and contributes to
rising levels of consumer debt. (Both Bank of America and MBNA are
included in the survey. Bank of America has just announced plans to
issued by credit unions have similar purchase interest rates but come
with fewer fees, lower fees, lower default rates, and conditions that
are much clearer. The details of the credit union card show how credit
card lending can be done sustainably without exorbitant penalties and
misleading terms and conditions.
credit cards come with a variety of very high fees. The highest of
these is the default rate which often approaches 30 percent. While
banks advertise 0 percent annual percentage rates (APRs) for balances
transferred to their card, only the fine print reveals that they charge
a balance transfer fee, usually a percent of the amount transferred,
for the service. Banks are twice as likely to charge fees on balance
transfers and cash advances than credit unions.
very hard to understand. Nowadays, a single credit card issued by a
bank may have three rates: one rate for purchases, a higher rate for
cash advances, and a lower rate for balance transfers. Furthermore,
providers may offer an introductory rate, but it may apply to only one
of these rates. Even so called convenience checks that come with the
monthly statement and are checks drawn on the credit card may have
different rates with the first several convenience checks charging a
different rate than the others in the set.
card solicitations are not fixed. Many banks advertise a range of
purchase rates a consumer may be charged and the rate is only fixed
after the customer has responded to the solicitation.
solicit customers indiscriminately. Banks sent five billion mail
solicitations to Americans last year, indiscriminately extending credit
to those who can’t afford it or do not need it. Credit unions, on the
other hand, only market to their clearly-defined field of membership.
out of ten bank issuers in the survey include “universal default” in
their terms. This grants the issuer the right to increase a consumer’s
interest rate when (s)he is late or delinquent with an entirely
different creditor or utility provider. Usually, the rate increases to
the default rate; among the ten banks in the survey, this rate averaged
25.4 percent. It becomes very difficult for consumers to pay off their
balances at rates this high. No credit unions in the survey implement a
universal default scheme.
The report suggests that the
intricate web of penalties and fees implemented by the credit card
industry may be one of the key factors for the high level of
indebtedness among Americans. In January 2005, the average U.S.
household had seven credit cards and carried a balance of $14,000, the
highest level of debt ever. Between 1989 and 2001, despite the
unmatched economic prosperity of the 1990s, credit card debt in America
almost tripled, from $238 billion to $692 billion. And while in 1980,
U.S. households’ outstanding debt was about 70 percent of disposable
household income, today it is over 105 percent.
costs of credit cards are excessive,” concludes Malcolm Bush, President
of Woodstock Institute. “What’s worse, banks go out of their way to
hide the costs. The result is an increasing number of households
trapped in a downward cycle of debt.”
policy recommendations. These recommendations are particularly timely
because the Federal Reserve Board is currently considering changes to
Regulation Z, the regulation that implements the Truth in Lending Act.
Also Congress is currently considering a ban on universal default.
The full version of the report is available for download.
Institute, founded in 1973, is a nationally-recognized resource on
credit and capital needs of low-income and minority communities. The
Institute engages in applied research, policy development, and
technical assistance to promote community economic development.