Credit Card Terms and Conditions Have a Highly Deceptive Effect


Contact: Malcolm Bush or Tom Feltner
(312) 427-8070

Credit Card Terms and Conditions Have a Highly Deceptive Effect but Credit Union Issued Cards are Fairer than Bank Issued Cards, Says New Woodstock Institute Report

[Chicago] – 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.

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.

The full version of the report is available for download.

Blindfolded Into Debt: A Comparison of Credit Card Costs and Conditions at Banks and Credit Unions Blindfolded Into Debt: A Comparison of Credit Card Costs and Conditions at Banks and Credit Union

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.