The Economics of Late Fees and Other Excessive Charges
The economics of excessive charges in credit transactions becomes painfully clear in reading several paragraphs from articles on that subject. In a 2001 article, "A Roadmap to Avoiding Credit Card Hazards", it was stated:
credit card companies are charging interest rates as high as 40% per year. Consumers are subject to a host of unfair and deceptive terms and conditions, saddled with enormous fees, and encouraged by credit card companies to make low minimum payments so that the companies can earn more money in the form of interest.
As a result, the average credit card debt for Americans who carry balances reached an all-time high of $5,610 in 2000, an increase of one-third since 1995. As consumers struggle, credit card companies such as Providian and First USA are making bigger profits than ever. Between 1995 and 1999, thanks in part to aggressive marketing and misleading practices, companies' profits nearly tripled, jumping from $7.3 billion to $20 billion.
In addition to raising the interest rate of the card, issuers also charge the consumer a late fee, now typically between $29 and $39. According to one survey nearly 60% of consumers had been charged a late fee in the past year.
Revenue Generated by Late Fees: 1996: $1.7 billion; 2002: $7.3 billion.
2. Penalty and Other Fees Skyrocketed in the late 1990s
While annual fees have largely disappeared, credit card issuers now levy several different fees, other than the late fee: the balance transfer fee; the over-the-limit fee; the cash advance fee; and the foreign exchange fee.
Revenue Generated by All Fees: 1995: $8.3 billion ........2004: $24 billion.
In the Chewok Blogspot website, it was explained:
Even if you manage to keep your head above water with rising interest rates, the Fee Sharks are circling. Another Supreme Court decision in Smiley v. Citibank lifted all restrictions on the fees credit card companies could charge. That’s when the once $5 and $10 late fees became the $29, $35, $39 fees we see today – conceivably $50 and $60 in the near future. Banks are tweaking factors that make it more favorable for them to collect fees, such as the way they calculate interest, and shifting payment due dates to coincide with holidays. Thanks to these and other tactics, banks have doubled their revenue from credit card fees since the Smiley decision.
Information about the documentary is available at Transcript of the WGBH Educational Foundation 2004 Frontline Documentary.
Researchers should look at three decisions:
- Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735 (1996). The
Court held that "The Comptroller of the Currency has reasonably interpreted
the term "interest" in § 85 [of the National Bank Act of 1864] to include
late payment fees, see 12 CFR § 7.4001(a), and petitioner has failed to
establish that the Court should not accord its customary deference to the
Comptroller's interpretation of an ambiguous provision of the National Bank
Act. Pp. 3-11." Source: Copy of the
Supreme Court's Smiley Decision.
- Marquette National Bank of Minneapolis v. First of Omaha Service
Corp., 439 U.S. 299 (1978). The Court in its decision stated: "The
question for decision is whether the National Bank Act, Rev. Stat. 5197, as
amended, 12 U.S.C. 85, 1 authorizes a national bank based in one State to
charge its out-of-state credit-card customers an interest rate on unpaid
balances allowed by its home State, when that rate is greater than that
permitted by the State of the bank's nonresident customers. The Minnesota S
upreme Court held that the bank is allowed by Section 85 to charge the
higher rate. 262 N. W. 2d 358 (1977). We affirm." Source: Copy
of the Supreme Court's Marquette Decision.
- Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-845 (1984). The Supreme held that it defers to reasonable judgments of the Comptroller, the official charged with administering the National Bank Act, stating at pp. 842-866: "The Environmental Protection Agency's plantwide definition is a permissible construction of the statutory term 'stationary source.'" Source: Copy of the Supreme Court's Chevron Decision