Senate Hearing Attacks Credit Cards' Ridiculous Fees

A Senate hearing today called up executives in the credit card industry to defend their anti-consumer practices, their explanations provoking laughter from the crowd.

The bank’s defense concept of “trailing interest” was one such occasion for comedy. Under this scheme, if an individual owes $5,020 and pays $5,000 of it, next month they pay interest on the full $5020, not just the $20 owed. Reports Consumer Affairs:

Bruce Hammonds, president of Bank of America Card Services, Richard Srednicki, chief executive officer of Chase Bank USA and Vikram Atal, Chairman and CEO of Citi Cards, all said that “trailing interest” is a practice shared by various lending schemes but gave no specific examples.

Fees are only allowable to the extent they cover costs incurred by the business. They are not a money-making mechanism. The miraculous realization of this fact, after Senate prodding, is why many large lending institutions are getting rid of some of these ridiculous fees. Only continued inquest, however, will ensure that real reform is enacted and that bank’s aren’t just throwing out a minor compromises to placate the committee. — BEN POPKEN

Credit Card Executives Tough Out Senate Hearing [Consumer Affairs]
(Photo: Sam Wilkinson)

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  1. Xkeeper says:

    All I can say is, about. fucking. time.

  2. VA_White says:

    Please, for the love of all things decent, the word is “ridiculous.”

  3. gorckat says:

    The ‘trailing’ interest thing, if it means ‘average daily balance’ is often misunderstood. I only understand it form working for a credit card.

    For 25 days of your 30 day billing cycle, you balance is $5020. On the 25th day, your $5000 pmt hits.

    You average daily balance is (25x$5020 + 5x$20)/30, or 125,600/30=$4186.67…so you pay interest on ~$4200.

    I actually think that is a fair way to assess an interest charge. Now, double cycle billing…that’s bullshit.

  4. gorckat says:

    It also works out the same if you figure up the daily interest rate (APR/365) and add interst one day at a time.

    That just takes a lot longer by hand :p

  5. Helvetian says:

    Thank heavens! Good news.

  6. olegna says:

    Boy do they need to do a whole lot more than this. I pad off $28,600 in CC debit in two years (long story). Every month I paid $1,500 to $2,500 for two years. My interest rates never changed. Citicard still considered me a 32.9% APR credit risk even after paying off religiously and in large payments. CapOne was still charging me 29.9% under the same circumstances. I’m debt free now and will soon begin the annoying process of negotiating lower APRs on CCs that have no balance on them. (BECAUSE: I’ve hear that cancelling these cards adversely affects your credit score, which is another completely ridiculous scheme to force you to keep credit cards even if you don’t want them.)

    So take note: You can play the game by their rules, pay off your debt diligently. And they will still sit there and call you a credit risk , in may case even after digging out of a steep hole. *&%$# them all. I hope when the revolution in America comes, I hope these schmucks that engineered these awful schemes are the first to be sent to some Arizona gulag to pave roads for the rest of their miserable lives.

    Never forget this: Even if you play by their rules they will ALWAYS try to needle ways to screw you over. The only way out is not deal with them at all.

    Another thing: What’s the point of having a credit card if you only use it to spend money you have? Think about it. Especially now with the convenience of debits and pre-paid cards. There is no reason why there are so many people with credit cards these days except to over-spend. In other words: the entire credit card concept is specifically engineered to create debt and, eventually, inflict great damage to national economies for the profit of a small group of people that have found a way to profit off the stupidity of the masses. I really wish for a day when people spend responsibly, then boycott these usury organizations until they go bankrupt.

    Pipe dream, I know. At least until the revolution comes (insert emoticon here).

  7. Bobg says:

    I just received a credit card offer from Citi

    1. If the payment is late (my fault or the P.O.) it goes to the default interest rate of 32.24%.

    2. Balance transer-3% of the balance transfer.

    3. Cash advance-3% of the amount of advance.

    4. For going over the credit amount-$39 fee.

    5. Returned payment fee-$39.

    6. Returned convenience fee (?) $39.

    7. Foreign currency payments-3% of the purchase.

    8. Annual %-14.25% today (can be changed at any time for any reason.)

    9. Late payment fee-$15, $$29, $39 depending on balance.

    Note in the disclosure (If you fail to pay the amount that we think you owe, we may report you as delinquent.)

    NO THANKS MR. CITI. I THINK THAT I’LL PASS ON THIS ONE.

  8. hop says:

    i’m suprised the scumbag politicos are even taking this matter up……those slimeballs probably get good campaign money from that industry……..

  9. Hoss says:

    @olegna: Why use credit when you have the funds? First, points. I got $750 cash refund last year. Second, zero interst rates; you can borrow and invest their money. Third, using debit cards is a greater risk, gives thieves direct access to your bank account. Fourth, builds a good credit record; having a $20,000 credit line and using only $2,000 or so each month and paying it as you go fattens your record.

  10. I have my DVR set to record episodes of Frontline on PBS, and the episode that recorded yesterday was really, really interesting. Entitled The Secret History of the Credit Card, it dealt with a lot of the issues we’re talking about here (although it originally aired in 2004). The show won an Emmy and a Du Pont/Peabody; you can view it in its entirety by clicking here.

  11. pkchukiss says:

    I think what credit cards are good for are transactions which are high risk (i.e. Internet based purchases like from eBay, etc. which have a heightened risk of fraud).

    Having a credit card allows you to keep track of any fradulent transactions: just be sure to check the bank statement frequently (especially if you have online access), and to pay for these purchases as soon as possible. We don’t want the bank to earn more than necessary.

  12. NeoteriX says:

    @olegna:
    “cancelling these cards adversely affects your credit score”

    Someone can correct me, but this only happens insofar as it affects one element of your credit score: your credit/credit limit ratio. Basically, you’re less of a credit risk if you’re using less of the total credit available to you.

    Let’s say you have two credit cards with $1000 limits. One card has no balance, and the other has a balance of $500. If you drop the card with no balance, you’ve went from having a ratio of $500/2000 to 500/1000.

    The good news as I understand it is that this is only temporary. Feel free to drop the cards if you’re not expecting any big purchases that will require a credit review.

  13. NeoteriX says:

    Just to add further, I understand you are skeptical about credit cards from your experience, but they can be used in a way that maximizes a consumer’s power as long as the balance is paid off in full every month.

    Credit cards offer significant fraud protection, and many people exercise the use of the “chargeback” when unsatisfied with a purchase. Vigilant use will increase your credit rating. Many credit cards offer things like added warranties, price matching, dividends, etc. Plus, with a credit card, you can get an itemized statement that helps track where money went (because cash disappears like air for me)

    Consumers just need to turn the tables and take advantage of the credit card companies instead of the other way around.

  14. Pelagius says:

    Someone can correct me, but this only happens insofar as it affects one element of your credit score: your credit/credit limit ratio. Basically, you’re less of a credit risk if you’re using less of the total credit available to you.

    At one point the ratio works against you. Lenders don’t like to see someone with tons and tons of available credit on the reasoning that it allows you to go from debt-free to owing tens of thousands very quickly. The advice I’ve received in the past is to limit yourself to two cards – one you use on a regular basis and one ‘backup’

  15. olegna says:

    >> Why use credit when you have the funds?

    I used the credit when I didn’t have the funds. The second I started getting paid enough to afford $1,500-$2500 a month in CC payments I immediately went into paying off the debt.

    >> Fourth, builds a good credit record; having a $20,000 credit line and using only $2,000 or so each month and paying it as you go fattens your record.

    That’s good to know. I hope having paid off nearly $30K in two years has helped my credit score, too. (Unfortunately, since I live overseas I’m not eligible for my free credit score and I haven’t figured out how to get it otherwise.)

    >> Someone can correct me, but this only happens insofar as it affects one element of your credit score: your credit/credit limit ratio. Basically, you’re less of a credit risk if you’re using less of the total credit available to you.. . . The good news as I understand it is that this is only temporary. Feel free to drop the cards if you’re not expecting any big purchases that will require a credit review.

    I would very much like to know more about this. In my experience with credit cards, racking them up then paying them off, I think I probably signed up for several accounts over the years I am no longer using (but may still be considered active). I would like to cancel all my accounts that I might having lingering (once I figure out how to even compile this information!) and stick with the tree cards I have now (with zero balances).

    Also, I plan to make a big home purchase sometime in the next three years and would love to know how canceling my accounts is going to hurt my score.

    But then again, if NOT canceling my accounts is beneficial I guess I will stick to that. It seems ridiculous to consider high credit lines in the score since it’s in the interest of financial institutions to give credit lines that are larger than people’s ability to pay them off. Having five credit cards and a $20,000 limit doesn’t automatically make me more responsible (or less of a credit risk) than somebody with three cards and $40,000 limit. It’s completely arbitrary! Somebody with $1,000 limit and no balance – but who cancelled three cards — is more responsible than somebody with two cards, $10,000 limit and $5000 owed, right? Yet it seems the former is peanlized for canceling his cards and the latter is rewarded for using his credit.

    >> The advice I’ve received in the past is to limit yourself to two cards – one you use on a regular basis and one ‘backup’

    Yeah, well I’d love to hear advice on what to do if you have more than two cards and don’t want them anymore. And explain the logic behind screwing with somebody credit score if s/he makes a consumer choice to cancel a CC account. That should be a crime because it can adversely affect your ability to get a mortgage or other secured loans.

  16. aixwiz says:

    @Bobg:
    Bobg,
    Why waste the time reading the offer? Do like I do: when I get a credit card offer in the mail I use it to feed my cross-cut shredder. Much more satisfying than reading it.

  17. Pelagius says:

    There’s a detailed explanation of the “cancelling cards/credit score” question here.

    To summarize:
    1. Credit/use ratio: If your percentage of available credit used would be over 30-35% if you cancelled cards, it could hurt you. Otherwise, it won’t.
    2. Hold on to older cards.
    3. You can have too many cards, but there’s “no magic number” on this and up to 10 cards may still not be too many.

  18. Pelagius says:

    There’s a detailed article on the “cancelling cards” question here. In short, as long as the percentage of credit used vs. credit available doesn’t top 30-35% after you’ve cancelled your cards, then go for it. Also, retain your older cards if possible.

  19. mac-phisto says:

    they need to review more than fees. apr, compounding, and payment calculations also need to be on the board. 30% is considered usuary in most states, but in reality, most mainstream cards are charging anywhere from 19%-29%. pretty steep considering prime lending rate is hovering around 8%. @gorckat – double cycle billing should be a crime.

    also, are you aware of “universal default”? almost all cards now carry this condition which allows them to change your credit terms to the “late payer” apr if you pay ANY card late.

    & what of adjustable terms? i had a card that was fixed 11.9% “for life” when i got it. turns out “for life” actually means “until we feel like adjusting it to a variable 19.9%”

    the industry claims they need to charge these fees and rates to offset losses due to defaulting customers. the reality is that all of these big banks top the 500 lists for net profit year after year. it’s disgusting. imho, interest & fees on all cc should be tax deductible & offset by a government tax on all business income earned from money loaned above prime.

  20. olegna says:

    Pelagius, thanks for the info. As I take it: as long as I do not have any debt, then my ratio would be less than 30-35% under any circumstances and it shouldn’t affect my credit score to cancel the cards.

    Now if I can only figure out how to compile a list of every credit card I’ve ever owned and subsequently cut to pieces and forgot about without actually canceling my account. Ugh. I think the only card I’ve ever gone through the rigarmrole to cancel was Discover, and that was like a 15-minute phone call until I finally had to tell the CSR that there was nothing that person could say that would convince me not to cancel my account, and that his persistence only made my conviction to cancel stronger. (And then the schmuck said “well, if you cancel it could hurt your credit score.” Arrrgh.)

  21. bearymore says:

    They are truly unbelievable. Recently I had an unauthorized $86 charge on a Bank of America credit card. For some reason, all but $5.85 was credited back to the account. This $5.85 appeared on my next bill as overdue with $1.50 interest added. This was astounding as it said on the statement, “APR for this billing period: 84.10%.” I told the CSR that even if I did owe the money, which I don’t, I could get better rates from Tony Soprano.

    Now I’m waiting for next month when the $5.85 is credited, but a late fee is addedd.

  22. katana says:

    “Another thing: What’s the point of having a credit card if you only use it to spend money you have? Think about it. Especially now with the convenience of debits and pre-paid cards. There is no reason why there are so many people with credit cards these days except to over-spend. In other words: the entire credit card concept is specifically engineered to create debt and, eventually, inflict great damage to national economies for the profit of a small group of people that have found a way to profit off the stupidity of the masses.”

    Exactly!

  23. katana says:

    “I’m debt free now and will soon begin the annoying process of negotiating lower APRs on CCs that have no balance on them. (BECAUSE: I’ve hear that cancelling these cards adversely affects your credit score, which is another completely ridiculous scheme to force you to keep credit cards even if you don’t want them.)”

    If you’re debt free, then shred those cards and cancel the accounts. You don’t need them, as you’ve stated, and you certainly don’t need to maintain your credit score.

  24. olegna says:

    >> and you certainly don’t need to maintain your credit score.

    Uh, unless you want to obtain things like a mortgage. Secured lending depends highly on your credit score.

  25. hloulou17 says:

    I have had a credit card with MBNA since 1999
    My balance is $11,600. I’ve been paying
    $165. a month since that time but it never
    gets down. Last month, I was late a day and
    my rate went from 9.99 to 24.9. I called
    them and complained and they set my rate at
    16.9. I happened to tell them I was laid off
    and they closed my account. I think they are
    totally unethical and use drastic business
    tactics. I also just got a note that in July
    my terms are changing. How does the little
    guy fight these big companies? It is totally
    unfair.

    Mary Lou

  26. Alpheas says:

    To Mary Lou,

    With a balance of 11.6k, how on earth did you expect that balance to go down with 165 a month? And as for closing the account, you are an extreme credit risk, now that you got laid off. They were protecting themselves.

    To others.

    Why do you all insist that having a credit card is a necessity? building Credit? There are better ways to build credit with out giving a company free money. Renting, bills, student loans. I had 4k in student loans paid them off quickly and my score jumped 100+ points.

    For emergencies? Make an emergency fund…
    For spending? Pay in cash, you can get deals that way?
    For credit building…? Well you know.

    Credit cards are a suckers game.

  27. Alpheas says:

    Mary Lou.
    Why were you expecting your balance to go down. You were paying right at the absolute bare minimum. As for hiking your interest rate, you signed up for that credit card contract… As for closing your accoun, you were a huge credit risk, since you had no job. They were merely protecting themselves. Totally ethical.

  28. farscape7 says:

    The senate hearing was theater. Congress and your president sold out to them with the new bankruptcy laws.

  29. Bobg says:

    If you want to see how long it will take to pay off the credit card use the credit card calculator at the following site:

    http://www.bankrate.com/brm/calc/creditcardpay.asp