Card fee is focus of stir Court ruling to cause high late charge, say consumer advocates

State limits can be ignored

But competition would reduce effect of increase, many say

June 09, 1996|By Bill Atkinson | Bill Atkinson,SUN STAFF

Like the soaring price of gasoline, credit card fees could soon take off.

Consumer advocates and industry consultants warn that a decision by the Supreme Court last week not only paves the way for banks to raise late payment penalties, but opens the doors for a host of other fees that will be borne by consumers.

The ruling says that credit card issuers can ignore state laws that limit charges against tardy consumers.

It's a huge victory for the multibillion-dollar credit card industry, which has been fighting the battle for years, but it could prove to be a win at the expense of its customers.

"It's a blow to consumers not only in the credit card area, but for consumer protection generally," said Michelle Meier, counsel for government affairs with Consumers Union, a Washington-based consumer advocacy group.

The court's decision "really takes a monkey -- almost a gorilla -- off the back of these card issuers," added Robert B. McKinley, president of RAM Research Group, a Frederick-based independent research and publishing firm that follows the industry. "They don't have to deal with the local regulations. The larger impact is this really gives a green light to charge lots of other fees."

Bankers disagree, arguing that the ruling will benefit consumers by forcing delinquent borrowers to pay their own freight instead of spreading the cost among all credit card users. And they don't see rates rising in the wake of the decision.

But McKinley says credit card issuers have little choice other than to hit consumers with new fees because the business has grown more competitive in recent years.

In the mid-1980s, credit card operations returned up to 6 percent -- that's when consumers were paying a $20 annual fee and 19 percent interest. But while the business is still lucrative, returns have fallen to the 2 and 3 percent range, McKinley said.

"There is a lot of pressure on profits," he said. "It's not the gravy train it used to be. [A new fee] is a way to tweak the yield."

McKinley sees the ruling spurring the growth of "nuisance fees."

Consumers, he said, could likely be charged for requesting the credit card company to check balances, for mailing statements, or for using their cards for too many small transactions, he said.

"This is really a triple whammy for consumers, it really couldn't come at a worse time," he said.

The reason? Consumers are having a tough time keeping up with credit card payments. Delinquencies have jumped to 4.45 percent in the fourth quarter of 1995, up from 2.9 percent in the third quarter of 1994, according to the American Bankers Association. The association expects delinquencies to continue rising this year, surpassing record delinquencies of 4.92 percent in the first quarter of 1986.

This is happening while banks have increased late fees over the past several years, McKinley said. The average late fee is $13.28, but he has seen fees as high as $25.

Even grace periods are shrinking, he said. The AT&T Universal card used to give consumers a 10-day grace period on late payments, but now it's down to one day, McKinley said.

"Most banks used to let you slide a full month before hitting you with a fee," McKinley said. "Just from the late payment angle it is critically very bad news for consumers."

But consumers have had a long-standing love affair with their credit cards.

Last year, they owed 6,800 credit card issuers roughly $360 billion. And they are currently paying interest on about $280 billion, which at a nationwide average of 17.6 percent, works out to about $50 billion in interest payments, according to RAM Research.

To protect consumers from hefty credit card fees, dozens of states enacted laws either limiting or prohibiting banks with credit card operations within the state from imposing late fees. Maryland, for instance, limits the penalty credit card issuers can charge consumers who write bad checks to $15. It also prohibits charging a fee when a person exceeds his credit limit.

"That is a fee that credit card companies would like to get," said H. Robert Hergenroeder, Maryland's acting banking commissioner.

To escape such laws, banks set up their credit card subsidiaries in states like Delaware and South Dakota where the consumer protection regulations are less restrictive and allow the companies to set higher interest rate fees.

For years, the credit card issuers have argued that a consumer, say in California or Maryland, who uses one of their credit cards is bound by the laws of the issuer's home state.

Hergenroeder says the court's decision in the case known as Smiley vs. Citibank could be favorable to consumers.

"Consumers who use the credit cards responsibly should have lower prices," he said.

George McCane, senior vice president with Dallas-based First USA Inc., which manages $18.3 billion in credit card receivables through First USA Bank, doesn't see credit card companies jacking up late-fee rates or hitting consumers with more fees.

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