Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, July 12, 1995 TAG: 9507140013
SECTION: BUSINESS PAGE: C-8 EDITION: METRO
SOURCE: Associated Press
DATELINE: NEW YORK LENGTH: Medium
After years of lenience for fear of losing customers, banks and other card issuers are now driven by a different motive: thirst for fee income. They're boosting rates for tardy payers and raising penalty fees for spenders who exceed credit limits.
Credit card experts and cardholder groups are critical of the new fees, saying they're exorbitant. They accuse issuers of seducing customers with offers of low rates and burying the charges in fine print.
Cardholders can end up with an annual percentage rate twice as high as the one they signed up for. On top of that, they have to pay multiple penalty fees if they pay late or surpass their limit a few times.
``If a person is chronically late, that should be penalized, but based on what we've seen, a lot of the time the punishments don't fit the crime,'' said Ruth Susswein, executive director of Bankcard Holders of America in Salem and McLean, Va.
Issuers counter that the fees offset higher costs associated with servicing negligent customers and encourage people to clean up their act.
Citibank and AT&T, the nation's two largest credit card issuers, are cracking down on cardholders who break the rules. Citibank, with 34 million cardholders, in April began raising rates for some late payers to 12.9 percent plus the prime bank rate, up from its standard rate of prime plus 9.4 percent.
AT&T, with 23 million cards, will raise rates for tardy payers to 11.9 percent plus the prime rate, beginning in September.
The company also is raising fees for exceeding charge limits or bouncing a payment check to $15 from $10. AT&T raised late payment fees to $15 from $10 earlier this year.
Other big card issuers are following. In September, Chase Manhattan Bank, the nation's fifth-largest card company with 13 million cardholders, will start levying a $15 monthly charge against customers when their balance goes over their limit by $100, or 5 percent. Previously the bank didn't charge an overlimit fee.
Customers are notified of the changes in their statements and through special notices. Issuers say the charges are necessary because their costs rise when they must send reminders or carry charges for late payers.
They also say it's more fair to customers who play by the rules. of their cardholder agreements.
``Those people shouldn't have to subsidize the people who don't pay on time,'' said Mitch Montagna, a spokesman for AT&T Universal Card.
But experts say there's another reason for the stricter policies. Competition has forced many card issuers to offer lower rates and waive annual fees, which has hurt profits. Now they're trying to make up for it through ``risk-based pricing,'' industry parlance for penalty fees.
``Fees have become much more important,'' said Bob McKinley, president at RAM Research Corp., a Frederick, Md.-based firm that tracks the credit card industry. ``Most of the profits are in interest charges, and when they go down, companies have to replace that with something.''
Average rates have fallen from around 21 percent a few years ago to around 18.3 percent now, according to RAM Research.
Issuers say they're careful about fining people with good payment histories, and say that if they penalize cardholders by raising the APR, they'll change the rates back within a year if cardholders pay on time.
But some issuers are penalizing customers that they consider higher credit risks, even if they haven't missed a payment. Capital One Financial Corp., a Falls Church, Va., issuer, examines cardholders' credit records and will change their rates if customers carry a lot of debt or have a history of late payments on other cards or loans.
``A risk assessment can't be based on just one piece of your credit picture,'' said Liz McLean, a Capital One spokeswoman. ``It's like car insurance - if you've had a lot of tickets, you pay a higher rate.''
by CNB