Chart of the day: Credit card late fees

By Felix Salmon
December 10, 2009
latest report on the latest tricks and hidden fees in the credit card industry:

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This chart comes from the Center for Responsible Lending’s latest report on the latest tricks and hidden fees in the credit card industry:

latefees.tiff

What you’re seeing here is the slow introduction of something called “tiered pricing” in late fees. Since 2001 or so, not all late fees have been equal: if you only have a small balance, then the late fee might be smaller. But the banks have done something rather cunning: they’ve steadily reduced their headline minimum late fee, while raising the late fee which is levied on most cardholders. As report author Josh Frank says,

A top late fee tier typically starts for balances of $250 and up. Roughly 9 in 10 consumers fall into this top tier, showing that issuers are not trying to create true proportionality in their late fee system. Instead they are creating a system that suggests a low fee exists, while in reality charging almost everybody the highest fee.

And that’s just the beginning of the card companies’ shenanigans. There’s minimum finance charges, for instance: you might have racked up just a few pennies in interest, but you’ll still be charged a $2 minimum finance fee — a fee, what’s more, which can even be applied on cards with 0% introductory rates.

And then there’s the interest rates, which have moved from being based on the Prime Rate, to being based on the highest Prime Rate in the previous three months.

Of course there’s more. There are inactivity and “account management fees”, for instance. There are rising minimum cash-advance and balance-transfer fees. And there are fees on dollar-denominated transactions in foreign currencies — that’s tripped me up in the past, and often it’s simply impossible to know which country a vendor might be technically based in. I once bought tickets to a gig in New York from the venue’s own website, for instance, but the ticketing company was technically based in Ireland, so bang, a foreign-transaction fee got levied. And real international transaction fees are going up too:

In 2004, the majority of the Top 8 issuers did not charge an international transaction fee. In 2009 three-quarters of the top issuers charge this fee to most of their accounts. The size of the fee has also increased. In 2004, most of the issuers who charged this fee had a fee of 2%. Today most issuers charge 3%.

There’s only one thing that consumers can really do to avoid all these fees, and that’s stop using their credit cards altogether. Banks are better at hiding fees than you are at finding them, and even if you think you’re being terribly clever by paying off your card in full each month, chances are you’d still be better off just using a debit card instead.

The longer-term hope, of course, is that a principles-based Consumer Financial Protection Agency would crack down on this kind of behavior, and force card issuers to make their fees much more transparent than they are now. But we’re not remotely there yet. For the time being, caveat emptor.

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Unfortunately, protections on debit cards are a lot less reliable than those on credit cards. Most people I know have been the victim of some minor level of credit card fraud, whether it’s dodgy restaurants, or shady shopkeepers when paying for Oyster credit leading to charges from India, or some insecure website losing its CC database (lead to charges from a US credit score company for me). There’s never a problem getting rid of those charges with a credit card.

With my Irish bank (Bank of Ireland), cash advances are free – both of fee and interest – if paid before the end of the month. And it’s one of the cheapest and easiest ways of getting foreign currency abroad, from ATMs, so I can avoid the vampires in the airports, never mind the vultures in the bank’s BdeC. (If I have to get cash, I’ll get it from the cash desk of a forex trader here in London.)

Barclay’s credit card, on the other hand, is a lot less useful: fees and interest on cash advances, fees on forex, fees etc. But it’s not like there’s a choice in the UK credit card market; they’re all crap.

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