Have Credit Cards Become Consumer-Unfriendly?

The recent problems within the credit card industry remind me of a story a colleague shared with me several years ago. It involved a student in his first day of a college business class. When the professor asked a simple question, “What is the first duty of a business?” — most of the students, who were young and eager to make a strong impression, answered, “To make a profit!” “Wrong,” stated the professor. “The first duty is to provide a good or a service. The quality of your good or service will determine the revenue you earn. Continually improving that good or service will maximize your position in the marketplace, yielding further revenues.”

One could argue that bankers have continually improved their product to make it more user-friendly: after all, millions of merchants all over the world accept credit cards; you can make purchases by card on the Internet regardless of the time of day; and, eventually, we may live in a cashless society. In the face of today’s uncertain economy, however, many lenders seem to have retreated from the basic principles taught in business school. Rather than catering to the needs of their customers and improving their products, they’ve instituted policies that are decidedly consumer-unfriendly. What brought us to this point?

Most consumers manage their credit responsibly, but the struggling economy has forced many Americans to rely more heavily on their credit cards, with predictable results. At the end of 2008, a record 5.6% of all credit card accounts were 30 days late. Credit card charge-offs- that is, accounts considered uncollectible – had risen to 6.3%, the highest mark since the first quarter of 2002. Industry experts predict that delinquencies and charge-offs will continue rising for at least another year.

As you might imagine, this increased level of risk has provoked a reaction in the credit card industry. Unfortunately for consumers, rather than refining their business models to remain competitive in the marketplace, many lenders have responded by raising fees and interest rates in an effort to boost sagging revenues. These increases are expected to generate a record $20.5 billion in fee revenue for credit card issuers in 2009. Let’s look at what a rate hike might mean for an average cardholder.

Let’s say an individual had an interest rate of 9% and a balance of $2,000 on her card at the time she missed making a single monthly payment. Without warning, her creditor raises her interest to a penalty rate of 32%. If the interest rate hadn’t changed, she would have paid her lender approximately $2,500 over a few years. At the penalty rate of 32%, she’ll repay approximately $13,200 over a few decades. Policies like these have compelled Washington to intervene on behalf of consumers; thus, the passing of the Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act.

For more information, or to speak with a certified credit counselor please contact Cambridge Credit Counseling at 800-897-2200 or www.cambridgecredit.org.

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