Romancing the Credit-Card Holder

The next time a credit-card offer comes in the mail, it might be worth looking to see if the terms are any friendlier.

For example, Chase Card Services elected early this year to scrap the arcane practice of two-cycle billing, in which the average daily balance is calculated over two billing cycles instead of one. The extended duration can result in higher finance charges for those who carry a balance on their card.

In March, Citigroup announced it was dropping two of its credit-card practices: hiking a card customer's rates and fees at "any time for any reason," and the practice of "universal default," where interest rates on a card can be jacked up if the cardholder fails to pay any other bill on time.

And in June, Chase and Bank of America announced programs to help customers better understand and manage their accounts.

To credit-card issuers, the new offerings are designed to please customers. But to skeptical observers, the moves are viewed as efforts to thwart a possible government crackdown.

Amid a raft of complaints about card issuers' practices, the Democrat-controlled Congress has stepped up its focus on cardholders' concerns. The results so far this year: various bills introduced to curb perceived abuses, and several Congressional hearings.

At one hearing in March, Wesley Wannemacher told lawmakers how he went over the $3,000 credit limit on his new Chase credit card in 2001, spending $3,200 to pay for his wedding. Evidently, the charges weren't paid off promptly, and his debt began to pile up. In all, Mr. Wannemacher, of Lima, Ohio, racked up fees and interest charges of $7,500, including 47 over-the-limit fees. And "if they hadn't reviewed my account, I would have paid another $6,110 on a $3,200 debt," he stated.

The reaction to his story was swift: At the hearing, Chase announced it would end over-the-limit fees on accounts that exceeded their credit limit for more than 90 days.

The credit-card industry has responded proactively because "they don't want government regulation," says Ellen Cannon of Bankrate.com. "They feel that if they show good faith, and make some changes to their practices, the government may simply go away."

But that may be increasingly harder to do. In addition to complaints, various studies, including a Government Accountability Office report issued last October, have shed light on today's higher fees. And some of the tougher credit-card practices have affected more than just fringe cardholders with poor credit ratings. They've also "hit mainstream card customers," says Robert McKinley, CEO of Cardweb.com. "That's where the backlash is coming from."

To be sure, consumer advocates say they believe the card industry is entitled to profits -- which it clearly obtains. According to Mr. McKinley, pre-tax profits for the bank credit-card industry (not including store cards) last year totaled $37.5 billion. That compares with $27.8 billion in 2002. "For some banks, credit cards are the biggest profit center," he says.

But to some consumer groups, some of those profits stem from deceptive "tricks and traps," and charges that seem to some like gouging. Oft-heard complaints include: fees that pile up and trigger additional charges, such as over-the-account-limit fees; and prolonged penalties, sometimes for slight infractions of a cardholder's agreement. "[Fees for] payments received even one minute late can reach as much as $50 and send a card-holder's interest rate to 30 percent or higher," notes Tamara Draut, of the public policy group Demos, in New York.

The 2007 credit-card survey by Consumer Action, released in late May, showed that the average interest rate on cards surveyed was 14.53 percent. But if cardholders paid their bill late, their interest rate could jump to an average of 24.51 percent, as a penalty, and even reach as high as 32.24 percent. And, among banks with balance transfer fees, six of those surveyed have no caps on the fees charged.