• August 12, 2005
  • By Coreen Bailor, (former) Associate Editor, CRM Magazine

Credit Card Woes Continue For Consumers

Banks need to support customers before they default on their credit card payments, according to Consumer Action's 2005 Credit Card Survey. The report, based on the nonprofit organization's assessment of 146 credit cards from 47 banks between April 1 and June 21, shows that 45 percent of banks surveyed have universal default policies, representing a slight uptick from last year's 44 percent. When asked what situations can prompt a universal default rate hike, 90 percent of respondents said a deteriorating credit score; 86 percent reported paying mortgage, car loan, or other credit obligations late; 57 percent said exceeding the credit limit; 43 percent said having too much debt; 33 percent said having too much available credit; 33 percent said getting a new credit card; and 24 percent said inquiring about a car loan or mortgage. Merrick Bank had the highest default rate with 35 percent, followed by Citibank and Providian, both with 29.99 percent. "When a customer is actually at the point of completely defaulting, there may have been some signs before that time that the company could've picked up on and dealt with in a more humane fashion than [what] most credit card companies seem to be doing at this point," says Linda Sherry, director of national priorities for Consumer Action (CA), and the survey's coordinator. "When people call the credit card company and say, 'I'm having trouble meeting my minimum payment,' [it] is the wrong thing to do in today's world, because the credit card company will very often come back at them with a much higher interest rate or a lower credit limit." Other survey results indicate a rise in the average penalty rate, up from 2004's average of 21.91 percent to 2005's 24.23 percent, which CA notes may be attributed to the many penalty rates that vary with the prime rate. Last year's prime rate rose two percentage points, from 4 percent to 6 percent. Seventy-nine percent of issuers noted that late payments translate into higher penalty rates, a decrease from last year's 85 percent, but of the issuers that have penalty rates, 43 percent responded that a penalty rate could be administered by making only one late payment, up 12 percentage points from last year's assessment. Additional findings include:
  • The average interest rate for all cards researched (146) is 12.61 percent
  • Of all the cards researched, 95 percent (138) carry late payment fees
  • Out of the 138 cards with over-limit fees, the average fee is $30.18
  • 99 of the surveyed cards did not have annual fees, but of the 47 with annual fees the average was $43.27, representing a year-over-year increase of 16 percent As for the banks, Sherry urges them to be more selective in issuing credit cards. "You can get yourself in worse trouble with a credit card than you can with a mortgage or a car loan, so why shouldn't the underwriting standards be as important going in? If someone has a decent credit score or a decent credit history, the credit card companies seem willing to just give them basically a blank check. This is actually helping people dig their hole." Related articles: Online Credit Card Branding Is Weak Banks Are Failing to Cash in on Customers Consumers Want Banks to Show Tough Love
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