RebelCapitalist: Financial Information for the Rest of Us

Another Reason to Hate Credit Cards

Jun 09, 2010 | By: Mr_Blue | Tags: credit cards, credit card debt

And credit card companies and issuers. Remember: Debt is Evil - particularly credit card debt. Center for Responsible Lending recently released a study of late penalty fees. This study will not get a lot of attention in traditional media because they don’t want to offend big advertisers such as credit card companies and issuers.

The full report is called “A Just Fee or Just a Fee” and can be found here.

The study basically concludes that credit card issuers charge late penalty fees to increase profits and not to discourage customers from late payments or cover losses. Here are the findings from the study:

1) Issuers that use deceptive or aggressive pricing practices in other areas related to credit cards tended to charge higher late fees. Nine of the top ten best predictors of late fees were related to deceptive or aggressive pricing.

2) Issuers that are aggressive in areas outside of pricing tended to charge higher late fees. For example, issuers that send out a lot of cash advance checks or are aggressive in recovering losses charge higher late fees.

3) The type of issuer is strongly associated with late fee charges. The single best predictor of the amount an institution charges as a late fee is whether the issuer is a credit union. Credit unions charged a median fee of $20 compared to banks’ $39 for late fees.

4) Credit losses are a very weak predictor of late fee amounts. Only the length of a payment grace period had less relation. When other variables were included in the statistical analysis, higher risk was not correlated with higher late fees.

Bottom line: Credit card issuers (and companies) are leaches and will only get worse since issuers’ other lines of business are struggling so: 1) Pay on time and treat that credit card debt like a “hot potato” - get rid of it as quickly as possible. 2) Check your credit card rules on late penalty fees and if you MUST have a credit card consider one issued by a credit union.

Good luck.