It's time for a credit card revolution

By Liz Pulliam Weston

A few years ago, consumers in the United Kingdom got a break when the country's Office of Fair Trading told credit card issuers that their late and over-limit fees were too high.

Under U.K. law, penalty fees are supposed to bear some resemblance to the costs the card issuers actually incur. Regulators warned issuers that any fee over 12 pounds -- currently about $18 -- would be presumed unfair and would likely be challenged. The office estimated U.K. cardholders were paying at least 300 million pounds ($450 million) in excess penalty fees annually.

Cardholders blitzed issuers with demands for refunds and have since deluged banks with similar requests over bounced-check fees. The totals that have been repaid aren't clear, although the British Broadcasting Corp. reported that about 329,000 people had won more than $1.1 billion back from banks before the U.K. High Court intervened, suspending such claims until a ruling from the Office of Fair Trade on the matter. That body has yet to reach a decision.

The U.S. has no similar law limiting what credit card companies can charge, but until relatively recently that wasn't a problem. Before the mid-1990s, the typical late or over-limit fee was around $10.

Then banks began to realize that fee income was a much steadier source of profit than interest rates, which had started to decline. By 2006, late fees averaged $34, the U.S. Government Accountability Office found, and today many of the biggest issuers charge $39. In 2006, 35% of credit card accounts were assessed a late fee; the GAO estimates consumers paid $7.4 billion in penalty fees that year.

It wasn't always like this

Most of the credit card industry's worst practices are relatively recent innovations. They include:

• Universal default penalties that allow issuers to crank up your interest rate if you miss a payment with any other lender -- or have a fight with an insurer or wind up in a medical collection, an increasingly common occurrence.

• Ever-shrinking grace periods that make it more likely you won't get your statement in time to make the due date.

• Due times on due dates that result in late fees and higher interest rates if your payment fails to make it to the issuer's processing facility by, say, 1 p.m. on the due date.

• Fixed rates that change on an issuer's whim, rather than because of any misstep on your part.

• Fat fees for foreign transactions that add as much as 3% to the cost of overseas purchases.

Over the years I've advised readers on how to deal with these dirty tricks, starting with the obvious: Don't carry credit card balances because they leave you at the whim of issuers that feel no compunction to play fair.

But I really think it's time we just turned back the clock to 1990 and codify into law what was standard practice then. We should:

Ban excessive fees. Current late fees might make sense if credit card companies deployed fleets of employees to follow up with defaulting borrowers. But the vast majority of late fees are paid by folks who haven't defaulted -- that is, they haven't actually skipped a payment. They're just a few days late, and usually the issuer takes no action other than slapping on the fees.

Over-limit fees make even less sense because the credit card issuer controls which transactions get approved and which don't. If issuers really cared about risk, rather than boosting profits, they'd simply deny any transaction that exceeded a cardholder's limit.

And don't get me started on foreign-transaction fees. A 1% fee, charged by the Visa or MasterCard exchange that deals with the conversion, is probably excessive. There's no excuse for the extra 1% to 2% charged by many banks.

Continued: Restore 30-day grace period

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