bright investing

Banks are getting a little carried away with the fees they charge.

Penalties are supposed to be a deterrant to keep people from making late payments.  But banks and card issuers have turned these fees into a profit center instead, actually counting on late payment fees as a revenue stream.

If you want to know why credit card fees and penalties, in particular, are so outrageous, or if you think it just sort of happenned, you need to watch the Frontline episode called The Secret History of the Credit Card (watch it online here).  The fee and penalty structure used by the industry was designed as a profit center, in addition to the interest rates charged.  This is from the Frontline description:

But other consumers, like actor and author Ben Stein, use plastic purely for convenience. While it would appear that Stein — who says he charges a small fortune every month on his credit cards — is the ideal customer, in reality, he is what some in the industry call a “deadbeat.” That’s because he pays his balance in full every month.

That’s right, in the insane world of consumer credit, you’re a deadbeat if you pay your balance off every month.

If you want to know who to blame, Andrew Kahr is a good start.  He’s responsible for much of what’s wrong with the industry. From Andrew Kahr’s Wikipedia entry:

In a July 1998 memorandum to David Alvarez and Dawn Greiner, Kahr urged the company not to tell customers that some credit cards don’t have “grace periods,” a limited time for paying off balances before finance charges kick in. And in a September 1998 memo to marketing executive Greg Pacheco, Kahr suggested how to promote a for-fee cardholder buyers club program that in most cases offered tiny 1 % rebates at selected stores: “A 1 % rebate is a ‘discount on everything you buy.’ We could easily make that discount ‘up to 30 %’ just by randomly or systematically giving a few customers a big rebate.”

In a September 1998 memo to Mehta, Kahr advised calculating the credit protection charge as a percentage of the customer’s credit line:“The (credit protection) fee can be denominated at 9.8 cents per hundred dollars of line, or whatever, and this has the additional merit of making the $96 go away from the disclosure box.” The recommendation was underlined and the notation “excellent suggestion,” followed by the CEO’s initials, was penned in the margin.

Nice.