The report (.pdf) released Wednesday by the Government Accountability Office, Congress' investigative arm, describes the fees, interest rates and disclosure practices of 28 popular credit cards. It found that late fees averaged $34, up from $13 in 1995, while some credit-card issuers impose penalty interest rates of more than 30 percent on consumers who pay late or exceed the credit limit.
"Millions of Americans depend on credit cards to pay their bills and buy essentials like groceries or gas. Unfair or confusing credit-card practices take advantage of working families," said Sen. Carl Levin of Michigan, the senior Democrat on the Senate's investigative subcommittee, who had asked the GAO to conduct the study. "This report shines a needed spotlight on excessive credit card fees, unfair interest rates and inadequate disclosure practices that ought to be stopped."
Credit cards have become a ubiquitous and indispensable part of the culture, with an estimated 690 million cards in Americans' wallets and more than $1.8 trillion charged on them in 2005. Consumer groups have frequently criticized credit-card fees as excessive. The banking industry maintains that the costs of using a card can vary according to the risk posed by the account holder.
The new report shows "how pricing has changed with competition," Edward Yingling, president and chief executive of the American Bankers Association, said Wednesday. "The pricing has gotten more nuanced."
Regarding credit-card companies' delivery of information to consumers, Yingling acknowledged, "The disclosure system is not working well. It needs to be fixed."
Although interest rates vary widely, the GAO report says, "many cardholders now appear to have cards with interest rates less than the 20 percent rate that most cards charged prior to 1990."
In addition, the study found, holders of nearly half of all active credit-card accounts paid little or no interest in 2005 because they generally paid their balances in full.
Disclosure material explaining fees that is provided by the largest issuers of credit cards has "various weaknesses that reduced consumers' ability to use and understand" it, the report says. It found that the disclosures are written in language that is hard to understand, bury important information in text, fail to put related material together and use small typefaces.
Some fees, such as a $5-to-$15 charge to pay a credit-card bill by phone, often are not disclosed, according to the report.
It recommended that the Federal Reserve should revise rules on credit-card disclosures to require that they more clearly emphasize penalty fees and rates and what triggers them.
The study found that consumers can be charged:
- As many as three different interest rates for different transactions, such as one for purchases and another for cash advances, with rates for purchases ranging from about 8 percent to 19 percent.
- Penalty fees for making a late payment or exceeding a credit limit, with the latter averaging $31, up from $13 in 1995.
- A higher interest rate — sometimes exceeding 30 percent — as a penalty for paying late or other actions.
As an example, it cites a consumer starting a billing cycle with a zero balance and charging $1,000 on the card. The consumer pays $990 on time, expecting to pay interest on the remaining $10. But the card issuer charges interest on the full $1,000, with a charge of $11.02
"Charging interest on debt that has already been paid, as some banks do, is just plain wrong," Levin said in a statement.
The six credit-card issuers examined in the study, which together accounted for 80 percent of credit-card lending in the country as of 2004, are Citigroup Inc.'s Citibank, JP Morgan Chase & Co.'s Chase Bank USA, Bank of America Corp., MBNA Corp.'s MBNA America Bank, Capital One Financial Corp.'s Capital One Bank and Morgan Stanley's Discover Financial Services. The GAO study was conducted from June 2005 to September 2006. The auditors also interviewed 112 consumers with credit card accounts.
The interviews "indicated that many failed to understand key aspects of their cards, including when they would be charged for late payments or what actions could cause issuers to raise rates," the report says.