Opinion

Felix Salmon

Don’t worry yet about credit card fees

By Felix Salmon
July 22, 2010

It stands to reason that, just as overdraft fees are likely to be replaced with checking fees, something similar is going to happen with credit cards. But Ylan Mui overstretches, today, in her story saying that it’s already happening:

The new rules are estimated to cost the industry at least $12 billion annually, according to law firm Morrison & Foerster, and issuers have long warned that customers in good standing could wind up paying the bill.

“A lot of people thought they were blowing smoke, but they were spot on,” said John Ulzheimer, head of consumer education for Credit.com. “Now something has to give.”

The story is pegged to (but doesn’t link to) a new survey from the Pew Charitable Trusts, which says right there on its first page that “predictions that legal reform would stimulate the growth of new fees have so far not materialized”. Yet somehow the WaPo headline becomes “As credit card holders play it safe, issuers increase non-penalty service fees”.

The fact is that some fees are rapidly disappearing entirely: Pew notes that “less than 25 percent of all cards examined had an overlimit fee, which is down from more than 80 percent of cards in July 2009.

As for the standard penalty fee for late payment, it’s currently $39 (unchanged), but will drop to $25 in August, thanks to the CARD act.

I’m going to trust the Pew survey, here, rather than the quote from the guy from Credit.com, who in any case is quoted later on in the story saying that thanks to “a major competitive dynamic”, card companies won’t be able to charge new fees to strong customers.

And I don’t like the way that the story includes things like this:

About 14 percent of bank credit cards have annual fees, about the same as last year. But the median annual fee for the 12 largest banks’ cards rose 18 percent, to $59, over the past year.

The median annual fee for the 12 largest banks’ credit cards was zero last year, it’s zero this year, and it will be zero next year. If you take the 14% of cards which do charge a fee, then that fee has risen from $50 to $59. But it’s clearly very easy to avoid that fee, if you’re so inclined: just switch to one of the 86% of cards which don’t charge a fee.

My feeling is that the WaPo piece is simply wrong, and that we’re not going to see increased fees on credit cards. Instead, we’re much more likely to see decreased rewards. High spenders who pay their balance in full every month are still profitable for card companies, especially if those card companies don’t pay them back a lot in the form of rebates, miles, and the like. It’s true that people with bad credit aren’t going to be as profitable for the banks as they were before. But it’s not at all obvious that the banks are going to be able to make up those profits with higher fees on people with good credit.

Comments
3 comments so far | RSS Comments RSS

I agree with Felix. There are some businesses (e.g. auto insurance in regulated states) where you are forced to “make up” for bad customers by overcharging good customers. But credit card companies can choose their customers.

If my credit card company wants to overcharge me to make up for losses on another part of their portfolio, I will simply take my (profitable) business to another company that sees things more clearly.

Posted by TFF | Report as abusive
 

What’s the status of merchant fees. I’ve never understood why they don’t rise up in rebellion against the oligopoly of credit card networks.

Posted by Neubert | Report as abusive
 

A debit card works like a check. You better have the money in your checking account when you use it because it will (in most cases) be debited within that banking day or the next day. Money in your savings will not be the account your debit card is linked to and is a separate account. A credit card is just that-credit. You pay on that usually monthly and unless you pay the entire amount due, will accrue interest on the amount due. How much interest depends on the agreement you have with the credit card company.

 

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