Earlier this month the Senate Banking Committee began a process that will take a long, hard look at the way American banks handle the credit card industry. Some of the items on the agenda include annual fees, credit card expiration dates, universal default pricing, double-cycle billing and late payment policies (to name a few). Each of these banking practices plays a major role in the way issuers handle your account, and the changes may very well impact your favorite credit card program. For the next few days, weâ€™ll take a look at what each of these industry terms mean and how they affect your everyday life.
Day One: (Mandatory) Annual Fees For All Credit Cards
Todayâ€™s topic is the policies behind annual fees on credit card offers. At the moment, there is no regulatory law or rule in place that governs how the banking industry chooses to impose annual fees on credit products â€“ but one of the things being discussed is the possibility of a mandatory annual fee for all credit card consumers. You read that correctlyâ€¦ a mandatory annual fee for all credit card holders. While this may seem to be an outrageous suggestion that benefits no one, letâ€™s examine what an annual fee does and why the Senate is talking about making everyone pay one.
Credit Cards & Annual Fees â€“ A Definition
Annual fees cover the average cost of a credit card holder to the issuer by guaranteeing a stream of revenue from every client at least once a year. Every time you access your bankâ€™s website, make a phone call to a customer service representative, or mail in your payment, it costs the credit card company something to process the transaction. If you pay an annual fee for the services your credit card company provides you, then their costs for maintaining you as a client are covered; alternatively, if you do not pay an annual fee they must seek that revenue elsewhere.
The Government Accounting Office estimates that 50% of all credit card holders pay their credit card bill back in full at the end of each month. This essentially means these clients are getting an interest free loan from their credit card, which makes their value to the credit card issuer significantly less than a person who continually carries a balance and pays interest on that amount. Annual fees began to disappear from the more mainstream credit card products in the late 1980s as a means to lure consumers from competing banks; by the mid-to-late 1990s these fees were all but eliminated. In order to make up the lost money, banks began pressing the people whop are the least capable to pay them back â€“ the clients with fair to poor credit ratings.
What Annual Fees Are Doing Today
Interest rates for people with poor credit are insanely high, but (perhaps more interesting) so are the rates of people with great credit who happen to miss a payment or two. The â€œno annual feeâ€ craze brought about a wave of change that no one could have anticipated â€“ a change in the way credit card companies do business. It makes sense if you think about it: credit card companies donâ€™t have a guaranteed source of revenue, so they have to maximize every opportunity to make money off of every client in order to guarantee that they will serve their stakeholders and remain profitable. This gave rise to more hostile rate increase practices, steeper late fees, and less leniency when it comes to any sort of credit dispute.
Wrap Up â€“ To Fee or Not to Fee?
Letâ€™s examine both sides of the argument:
Mandatory Annual Fees work because they will lessen the pressure on banks to collect money at any needs necessary. This translates to less interest rate gouging toward less affluent groups (those with bad credit) and more opportunity for good credit clients to make mistakes without fear of unfathomable wrath in the form of rate increases. Another argument for this mandatory practice is the fact that all clients who use a service ought to pay for it, so while using a credit card is basically free at the end of the month if you pay it off entirely, that does not mean you shouldnâ€™t be paying for the convenience of the service.
Imposing Mandatory Fees is a Bad Idea because it should be up to the credit consumer to decide their own financial fate. While it is true that individuals with poor credit may pay rates up to 10 times higher than that of a good credit customer, they are also not obligated or forced to take on this responsibility and therefore do not have to apply for a credit product.
Where do you stand? What do you think? Let us know!
Team Your Credit Network