Credit card companies will have an easy time switching to new ways of assessing fees on their customers, according to a new report by the Center for Responsible Lending. The report documents several practices that the Credit CARD Act does not prohibit. According to CRL, it's just a matter of time before they proliferate.
"When bad products are allowed to flourish, it becomes a race to the bottom as they crowd out good products," said CRL's Kathleen Day. And switching costs make it unlikely that bank customers will go to the trouble of uprooting their accounts for another bank.
"Bankers know that you basically have to hit your customer with a 2x4 before they'll really leave, because it is such a hassle," Day said.
Of the practices described in its report, CRL highlights the "pick a rate" interest rate. Come February, fixed-rate credit cards will be truly fixed -- arbitrary hikes will be prohibited. But most credit cards feature rates that adjust according to the prime rate on a specific day within a billing cycle. With the "pick a rate" method, on the other hand, the cardholder's interest rate is determined by the highest prime rate on any given day in the previous three months, resulting in an annualized rate that CRL estimates is three-tenths of a percentage point higher, on average.
The Center reports that about one-quarter of credit card accounts feature "pick a rate" interest rates, resulting in a total extra cost to consumers of $720 million per year. "This cost could reach $2.5 billion per year if the practice becomes the industry standard," says the report, which adds that a few medium-size card issuers have long used "pick a rate" and that top issuers have just started to catch on.
The Huffington Post surveyed the eight largest credit card issuers -- JPMorgan Chase, Bank of America, Citigroup, American Express, Capitol One, Discover, Wells Fargo, and HSBC -- about the practices described in the report. Discover, Capitol One, Bank of America, and Chase provided answers; HSBC declined to comment.
"When bad products are allowed to flourish, it becomes a race to the bottom as they crowd out good products," said CRL's Kathleen Day. And switching costs make it unlikely that bank customers will go to the trouble of uprooting their accounts for another bank.
"Bankers know that you basically have to hit your customer with a 2x4 before they'll really leave, because it is such a hassle," Day said.
Of the practices described in its report, CRL highlights the "pick a rate" interest rate. Come February, fixed-rate credit cards will be truly fixed -- arbitrary hikes will be prohibited. But most credit cards feature rates that adjust according to the prime rate on a specific day within a billing cycle. With the "pick a rate" method, on the other hand, the cardholder's interest rate is determined by the highest prime rate on any given day in the previous three months, resulting in an annualized rate that CRL estimates is three-tenths of a percentage point higher, on average.
The Center reports that about one-quarter of credit card accounts feature "pick a rate" interest rates, resulting in a total extra cost to consumers of $720 million per year. "This cost could reach $2.5 billion per year if the practice becomes the industry standard," says the report, which adds that a few medium-size card issuers have long used "pick a rate" and that top issuers have just started to catch on.
The Huffington Post surveyed the eight largest credit card issuers -- JPMorgan Chase, Bank of America, Citigroup, American Express, Capitol One, Discover, Wells Fargo, and HSBC -- about the practices described in the report. Discover, Capitol One, Bank of America, and Chase provided answers; HSBC declined to comment.
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