As credit card holders play it safe, issuers increase non-penalty service fees

By Ylan Mui, Washington Post Staff Writer
Thursday, July 22, 2010

After the recession forced credit card companies to purge their rosters of the riskiest loans, the industry is facing a new problem: customers who are too good.

Card issuers have long found their bread and butter in penalty fees and high interest rates paid by consumers who carry a balance. But that business model has been upended by the legions of consumers who were overwhelmed by debt when the recession hit, forcing the industry to write off billions of dollars in loans. In addition, new federal laws limit how much card companies can charge risky customers.

Now, frugal-minded consumers are charging less on their credit cards, paying down their balances and steering clear of penalty fees -- steps that are financially responsible but have the industry scrambling to find new ways to make money.

"The only true deadbeat customer is someone who has a card and never uses it," said Curtis Arnold, who runs the credit comparison site CardRatings.com. "Just having good credit alone in today's market is not enough for that customer to be profitable."

A new study found that annual fees and service fees have increased over the past year while penalty charges -- which are subject to the new federal regulations -- remained largely unchanged. Meanwhile, some cards are encouraging customers to charge more by offering enhanced rewards, allowing the issuer to capture "swipe fees" paid by merchants. And one issuer even allegedly threatened to reject consumers with high credit scores because they didn't boost the bottom line.

Issuers typically generate revenue from two sources, interest rates and fees. Congress has clamped down on both of those channels this year, including banning interest rate hikes on outstanding balances and curtailing penalty fees for late payments and over-limit purchases. The new rules are estimated to cost the industry at least $12 billion annually and issuers have long warned that customers in good standing could wind up paying the bill.

Many issuers have homed in on fees that typically accompany rewards cards as a potential moneymaker. About 14 percent of bank credit cards have annual fees, about the same as last year. But the median annual fee for the 12 largest banks' cards rose 18 percent, to $59, over the past year. The cost of cash advances and balance transfers also rose from 3 percent to 4 percent.
Some consumers say they feel penalized for what they thought was good behavior. D.C. resident Alanna Sobel said she pays her balance in full each month and was surprised to get a letter from Chase, the nation's largest card issuer, notifying her that the annual fee on her Freedom card would be $30. The letter stated that the fee had been waived the previous year and would allow her to receive 3 percent cash back on gas and grocery purchases. If she did not pay the fee, she would have to settle for fewer perks.

But ultimately card companies won't be able to hang too many fees on the strongest customers, because that may drive them to do business elsewhere.

Issuers are also trying to entice customers to use their cards more often, allowing banks to collect fees from merchants, which must pay roughly 2 percent of the purchase price each time a card is swiped. The interchange fees, or "swipe fees," have also come under congressional scrutiny, and the Federal Reserve is slated to craft new regulations within nine months limiting card swipe fees for debit cards. That makes credit card swipe fees even more crucial to card companies.

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