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Consumers Beware -- The Profits Are In The Fine Print

James H. Dimmitt -- With banks squeezing more revenue from consumers, be smart and manage your personal credit wisely.

"Fees From Riskiest Card Holders Fuel Profits -- Late Payers and Big Borrowers Are Becoming Cash Cows as Rates Balloon" the headlines read in a recent article featured on America Online from the Wall Street Journal's Mitchell Pacelle. The article outlined how banks are squeezing more revenue from consumers and more often from the ones who can least afford it.

In the first example cited in the article, a woman found that the rate on her $12,000-limit credit card jumped from 19.98% to 24.98% over a one month period. She was neither late with a payment nor over her credit limit, two of the most common reasons for your card company to increase your rate.

When she spoke with a bank representative she was told the increased rate was a result of running up debt on two other cards and that she was paying just a little more than the minimum payment due on her card each month. According to the article, the bank "now saw her as a credit risk and feared it would take her forever to pay off her debts." Her response? "Isn't that what you want consumers to do?"

In the past, banks profited from charging consumers annual fees (typically in the $25-$49 range) and high interest rates (usually 18%). Today banks compete for their share of the market by advertising low interest rates (often teaser or introductory rates that apply only to the first 6-9 months) and make their profits from a variety of penalty fees. More banks are also offering credit to consumers with less-than-average credit in their efforts to gain a larger piece of the consumer credit pie.

In another example, a couple got hit with $140.00 in penalties. Their offense? They had used their debit card to make several small purchases on the same day that checks hit their account causing an overdraft of a little over $40.00. Even though their small purchases had been approved at the register, the bank subtracted the largest amount first, a standard practice at most banks. The couple complained about this practice but the bank stood their ground citing page 54 in the booklet the couple received when they opened their account which described the policy and warned customers that this bank policy "may result in additional overdraft fees."

A recent poll by Consumer Action found that 85% of banks commonly raise interest rates for customers who pay late even after just one single late payment. Nearly half of the credit cards surveyed raise their interest rates if they find that a consumer has made late payments to another creditor.

Banks defend these practices by stating that those who don't manage their accounts properly have to pay the higher rates and fees because they present a greater risk of defaulting on their accounts. Consumers and consumer advocacy groups charge that many consumers don't find out about higher interest and penalty fees until they've already been hit with them. Banks respond that all their fee structures are outlined in the disclosure statements sent to all credit customers. Customers complain that the fine print in the disclosure statements are too long and confusing to read and understand.

There were some valuable lessons to be learned from Pacelle's article:

1) Consumers must read and understand disclosure statements in order to know what fees and policies may be applied to their accounts at the discretion of the lender.

2) Be careful about "maxing out" your line of credit on any card. Doing so could result in higher interest fees being charged on other credit accounts.

3) Making minimum payments or just slightly more than the minimum each month could cause you to be viewed as a "credit risk" and result in a higher interest rate.

With banks offering a wide variety of credit rates to an increasing pool of applicants who may pose a greater risk, the smart consumer will take steps to decrease their personal credit risk by properly managing their accounts as well as decreasing their overall credit card debt.

James H. Dimmitt is editor of To Your Credit, a weekly free newsletter to help you manage your personal finances with money-saving tips and articles. Subscribe to the newsletter by visiting He is also author of Identity Theft -- How To Avoid Becoming the Next Victim! available at

© 2004 James H. Dimmitt

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