Credit Card Fees Rise

For the past several years, credit card fees have been rising, especially with respect to foreign travel this year. CardTrak reports that three years ago major card issuers were charging $10 for a $1,000 advance. Currently, most of the major bank card issuers are charging $30 to $50 to advance the same amount. Also, many card issuers charge a higher interest rate on cash advances than on credit card purchases. Many casinos will add a 5 percent "handling fee" on top of the cash advance fee of the bank.

More recently, fees on foreign transactions have been rising. Using credit cards overseas has been less costly than exchanging U.S. currency into foreign currency, especially when done overseas. For many years, both Visa’s and MasterCard’s transaction networks charged only one percent above the wholesale rate. However, within the past year some U.S. banks have raised the foreign transaction fee from one percent to three percent. Note that the extra two percentage points have not been imposed by Visa or MasterCard, but by the individual banks. Last summer, American Express raised its foreign transaction fee from one percent to two percent.

CardTrak advises that you check with your card issuer on its foreign transaction fee before traveling overseas and notify your issuer that you are planning to travel abroad. One of the reasons for raising the fee is the higher rate of fraudulent use of credit cards overseas. Sometimes a card issuer will put the card on hold after one or two transactions in order to assure that fraud is not involved. (This can happen even when traveling to the West Coast from the East Coast.)

There has been a protracted legal debate testing whether or not the charges on these loans are really "interest" and subject to disclosure requirements under Truth-in-Lending and to state usury laws. Payday lenders have variously described their services as leases or check-cashing transactions. The business is apparently profitable, given evidence concerning the expansion of payday lenders in states where they are licensed. A November 1998 report by Jean Fox of the Consumer Federation of America cites the growth in Colorado, where from 1997 to 1998 the number of payday lenders rose by 16 percent, the number of loans by 40 percent and the amount borrowed by 56 percent. She reports similar growth rates in several other states. At the end of November 1999, there were 24 states that permitted payday loans. Nineteen other states and two territories either (1) permit small loans by finance companies, but with low rate caps that do not allow payday loan firms to operate, or (2) specifically prohibit check cashers.

In those states where payday loans are permitted, the rate caps range "from $15 to $33.50 to borrow $100 for 14 days." These charges generate gross yields of 391 percent to 873 percent. In some states efforts to moderate the high rates have failed because of the wide gulf between the interested parties. In Indiana, for example, both the regulators and payday lenders attempted to lower the cap of $33 per $100, but could not reach a compromise.

According to Fox, "Payday lenders have recently partnered with banks to evade state laws that have limited the effective rate of interest they may charge." Essentially, the approach rests on the doctrine that national banks may export their rates to residents of other states, as in the case of rates on bank credit cards. Fox views this gambit as "extortion"—as a devious way "to export its home state's lack of regulation all across the country irrespective of whether their practices would be illegal for payday loans in the borrower's home state." Her recommendation is "legislation that prohibits banks from making loans based on personal checks or electronic withdrawals from checking accounts" or to set limits on the terms of payday loans made by banks and require them to abide by the laws of the states where borrowers reside.

The issue reflects a perennial problem in consumer credit. Small, short-term loans can be profitably made only at interest rates that offend those seeking to "protect" consumers. To illustrate the problem, assume that a store offers a consumer a hair dryer for $10 cash or $1 down and $1 a week for ten weeks. Total finance charge = $1; annual percentage rate = 102 percent. In the case of sales credit, as in the hair dryer example, the seller can always bury part of the finance charge in the cost of the merchandise. However, if this were a cash loan subject to a legislated rate ceiling of 36 percent in order to "protect" consumers, the loan would not be made.

Naturally, this outcome might cause the consumer to wonder "What good is the regulator's guarantee of a low interest rate if I can't get a loan?" Proponents of the payday loan industry are quick to point out that an alternative exercised by many consumers caught in an end-of-month cash shortage is to bounce checks. But, the typical $25-30 insufficient funds charge levied by banks (on top of the merchant's charge on returned checks) makes the payday advance fee look downright reasonable, especially if the shortfall would result in multiple bounced checks.