The U.S. Supreme Court gave its blessing to the card industry this month to charge consistent late fees across the country based on the regulations of the state from which a bank issues credit cards. Previously the Supreme Court ruled commercial banks may charge interest rates on credit cards subject to the limitations imposed by the home state or card issuing state of bank, not the state of the cardholders residence. However the issue of whether the same protection applied to fees associated with a bank credit card program was not settled until June 3.
State regulations pertaining to credit card fees are essentially all over the map. Some states limit or prohibit late fees, over-limit fees, returned check fees and annual fees. Litigation between card issuers, cardholders and even states attorney generals erupted over the past few years in Iowa, Massachusetts, California, Pennsylvania and New Jersey, to mention a few.
For the card industry the fee issue has been a monkey on their back. If a national card issuers portfolio held a large number of cardholders in another particular state, then the card issuer would generally disregard the state fee regulations, hold to its guns and defend all challenges. However if the number of cardholders was relatively, small the card issuer would generally comply with the state regulations and avoid possible litigation.
Since the majority of the card industry is based in loosely regulated states such as Delaware, South Dakota and Arizona cardholders in the U.S. will now see consistency in late fees regardless of where the cardholder lives.
Most cardholders will not immediately feel the effects of the Supreme Court ruling. But watch out !
Late payment fees have been rising and are being imposed sooner. Since last summer more cardholders have been bumping into late fees as delinquency rates rise. Its a triple whammy for consumers !
The most commonly charged late fee in 1990 was $10 and the average fee was slightly below $9. Today the most commonly charged late fee is $15 and the average is about $13. In other words late fees are up 40% to 50% since 1990. Among the top ten issuers, representing 53% of the industry, six charge $15, two charge $18 and two charge $20. Based on the current trend late fees will most likely average $20 by the end of the decade.
Six years ago most card issuers would only assess a late fee if the account was more than 30 days past due. Today the average is 18 days with some issuers imposing a late fee for being just one day past due. Last September the nations seventh largest issuer, AT&T Universal reduced its late payment grace period from 10 days to 1 day. Citibank, the nations largest issuer, charges a $15 late fee for every fifteen days past the due date. Likewise Discover charges a $20 late fee for every 20 days past due.
Delinquency rates have increased 25% in the past year and may continue to rise for the next twelve to eighteen months. Which simply means the Supreme Court ruling could not have come at a worse time for consumers.
For card issuers the timing of Supreme Court ruling was perfect. Profits from annual fees and interest have been shrinking due to intense competition. Other streams of card revenue, including late fees, have emerged as new, important profit centers. For example last year U.S. card issuers collected $1.65 billion in late fees. Furthermore card issuers compete on the pricing front end (annual fees, A.P.R.s, rebates, etc) not the back end (late fees, over-limit fees, cash advance fees).
What this all means is that late fees are destined to rise, and rise significantly. The Supreme Court ruling will now accelerate this trend.
Anyone who suggests competition will hold the line on late fees is out-to-lunch. While card issuers have significantly slashed interest rates and annual fees since 1992 we cannot find one documented example of a card issuer rolling back late fees or liberalizing the late fee policy.
Do banks compete on bad check fees ? When was the last time you saw a bank ad promoting its low bounced check fees ? Can you imagine a card issuer listing its low late fees as an incentive to apply ? If anything . . . competition will drive fees higher as card issuers feel out what the market will bear.
Frankly late fees on credit cards are illogical since cardholders already punish themselves when paying late. The interest clock keeps on ticking for most cardholders. If you paid off your previous monthly balance, the interest clock will begin to tick on the new balance as soon as the due date passes. In other industries the late fee is generally the only penalty assessed. For banks credit card late fees represents double dipping. Some issuers are now jacking-up interest rates for chronic late payers, effectively triple dipping.
For consumers the late fee ruling is the tip of iceberg of what is to come. All credit card back-end fees will rise. Over-limit fees, cash advance fees, returned check fees will increase too. And new fees will surface. Some card issuers already charge cardholders for each balance inquiry. Look for additional customer service fees or low usage fees to be imposed.
As a consumer the best advice is to assess the character of the card issuer you are currently dealing with or plan to deal with. If the card issuer will hit you with an above average late fee for being one day late, slam you with an over-limit charge for going one dollar beyond the credit limit or charges you for making too many account inquiries then tell em to take a hike. Read carefully the cardholder agreement. The application disclosure chart does not list every fee you may bump into. Finally pay attention to all correspondence from the card issuer which may alert you to a forthcoming change in the cardholder agreement.
Don't get pinched - toe the line.
