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New Woodstock Institute Report -
The Chicago-based Woodstock Institute has just released a
report describing the fees, rates, and terms of the
largest credit card providers in the U.S. titled
"Blindfolded Into Debt: A Comparison of Credit Card Costs
and Conditions at Banks and Credit Union." The report
documents the highly confusing terms and conditions now
used in the credit card industry. It suggests that the
deceptive effect of these complexities massively raises
the cost of using credit cards and contributes to rising
levels of consumer debt. (Both Bank of America and MBNA
are included in the survey. Bank of America has just
announced plans to acquire MBNA.)
The report also shows that credit cards issued by credit
unions have similar purchase interest rates but come with
fewer fees, lower fees, lower default rates, and
conditions that are much clearer. The details of the
credit union card show how credit card lending can be done
sustainably without exorbitant penalties and misleading
terms and conditions.
The complete report is available at
WoodstockInst.org
Key findings of the survey include:
• Banks' credit cards come with a variety of very high
fees. The highest of these is the default rate which often
approaches 30 percent. While banks advertise 0 percent
annual percentage rates (APRs) for balances transferred to
their card, only the fine print reveals that they charge a
balance transfer fee, usually a percent of the amount
transferred, for the service. Banks are twice as likely to
charge fees on balance transfers and cash advances than
credit unions.
• APRs are very hard to understand. Nowadays, a single
credit card issued by a bank may have three rates: one
rate for purchases, a higher rate for cash advances, and a
lower rate for balance transfers. Furthermore, providers
may offer an introductory rate, but it may apply to only
one of these rates. Even so called convenience checks that
come with the monthly statement and are checks drawn on
the credit card may have different rates with the first
several convenience checks charging a different rate than
the others in the set.
• APRs in credit card solicitations are not fixed. Many
banks advertise a range of purchase rates a consumer may
be charged and the rate is only fixed after the customer
has responded to the solicitation.
• Banks solicit customers indiscriminately. Banks sent
five billion mail solicitations to Americans last year,
indiscriminately extending credit to those who can't
afford it or do not need it. Credit unions, on the other
hand, only market to their clearly-defined field of
membership.
• Nine out of ten bank issuers in the survey include
"universal default" in their terms. This grants the issuer
the right to increase a consumer's interest rate when (s)he
is late or delinquent with an entirely different creditor
or utility provider. Usually, the rate increases to the
default rate; among the ten banks in the survey, this rate
averaged 25.4 percent. It becomes very difficult for
consumers to pay off their balances at rates this high. No
credit unions in the survey implement a universal default
scheme.
The report suggests that the intricate web of penalties
and fees implemented by the credit card industry may be
one of the key factors for the high level of indebtedness
among Americans. In January 2005, the average U.S.
household had seven credit cards and carried a balance of
$14,000, the highest level of debt ever. Between 1989 and
2001, despite the unmatched economic prosperity of the
1990s, credit card debt in America almost tripled, from
$238 billion to $692 billion. And while in 1980, U.S.
households' outstanding debt was about 70 percent of
disposable household income, today it is over 105 percent.
"The costs of credit cards are excessive," concludes
Malcolm Bush, President of Woodstock Institute. "What's
worse, banks go out of their way to hide the costs. The
result is an increasing number of households trapped in a
downward cycle of debt."
The report includes policy recommendations. These
recommendations are particularly timely because the
Federal Reserve Board is currently considering changes to
Regulation Z, the regulation that implements the Truth in
Lending Act. Also Congress is currently considering a ban
on universal default.
Woodstock Institute, founded in 1973, is a
nationally-recognized resource on credit and capital needs
of low-income and minority communities. The Institute
engages in applied research, policy development, and
technical assistance to promote community economic
development.
Contact:
Thomas Feltner
Communications/Development Associate
Woodstock Institute
407 South Dearborn Suite 550
Chicago, IL 60605
(312) 427-8070 tel.
(312) 427-4007 fax
tfeltner@woodstockinst.org
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About the ICFE:
About the
ICFE:
The Institute of Consumer Financial Education (ICFE), founded in 1982 by the
late Loren Dunton (creator of the “certified financial planner” (CFP)
designation) and it is dedicated to helping consumers of all ages to improve
their spending, increase savings and use credit more wisely. The ICFE trains and
certifies Personal Finance Instructors for its own curriculum. It also trains
and certifies Credit Report Reviewers and Identity Theft Prevention Specialists.
The ICFE is an award winning, nonprofit, consumer education organization that
has helped millions of people through its education programs and resources. It
publishes the Do-It-Yourself Credit File correction Guide, now in its 16th
printing and has distributed over one million “Credit/Debit Card Warning Labels”
and “Credit/Debit Card Sleeves” world wide.
The ICFE became an official partner with the Department of Defense/Financial
Readiness Campaign in June of 2004.
The ICFE is also a partner in the national Jump$tart Coalition for Financial
Literacy and the California Jump$tart chapter. The ICFE staff is also active
with San Diego Saves, an offshoot of America Saves, and the California Student
Debt Resource Awareness Project (CASDRAP) (studentdebthelp.org).
The ICFE’s on-line help for consumers who spend too much was featured in PARADE
Magazine in the Intelligence Report section. The money helps and tips are from
“The Money Instruction Book,” a course in personal finance, positioned to become
among the premier programs in the new bankruptcy and debtor education
initiatives.
The ICFE Web site at:
http://www.icfe.info helps consumers with mending spending, learning about
the proper use of credit, budget and expense guidelines, how to set up and
implement a spending-plan and also how to access financial education courses and
videos and how to teach children about money. Other ICFE services include a free
eNewsletter, and an online resource center of financial education learning
tools, including videos, books, software and personal finance courses.
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