Nitty Gritty News
Wednesday, July 27, 2005
Bill Randall

The 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.

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.

“The 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.”

The report also shows that credit cards 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

Key findings of the survey include:

Banks’ 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.

APRs are 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.

APRs in credit 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.

Banks 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.

*These clippings are provided for “fair use” not-for-profit,
educational purposes (and other related purposes).  If you wish to use
this copyrighted material for purposes of your own that go beyond “fair
use,” you must obtain permission from the copyright owner.  Please
contact Woodstock Institute for more information.