Levin Releases GAO Report That Discloses Excessive Credit Card Fees, Unfair Interest Rates, and Disclosure Problems

WASHINGTON - Sen. Carl Levin, D-Mich., ranking Democratic Member of the Permanent Subcommittee on Investigations, today released a U.S. Government Accountability Office (GAO) report [PDF] analyzing credit card fees, interest rates and related disclosure provided to consumers. The report, requested by Levin, is the first federal study to compile in a single place a description of the recent fees, interest rates and disclosure practices of 28 popular credit cards from the six largest credit card issuers.

“Millions of Americans depend on credit cards to pay their bills and buy essentials like groceries or gas,” said Levin. “Unfair or confusing credit card practices take advantage of working families. This report shines a needed spotlight on excessive credit card fees, unfair interest rates, and inadequate disclosure practices that ought to be stopped.”

Levin continued, “For instance, charging interest on debt that has already been paid, as some banks do, is just plain wrong. Late fees are nearing $40 per month and take a real bite out of a middle class paycheck. Some banks are charging families a $15 fee to pay their credit card bill over the phone before the late fee kicks in – actually charging families money to pay their bill. That’s outrageous.”

Findings of the GAO report, the result of a yearlong study, include the following:

• Increased Credit Card Use. U.S. consumers now have about 690 million credit cards and the amount charged on them between 1980 and 2005 has grown from approximately $69 billion to more than $1.8 trillion. According to the Federal Reserve, the average American household credit card debt in 2004 was $5,100.

• Higher Late Fees. GAO reported that the average penalty in 2005 for making a late payment was $34. That’s a 115 percent increase from the average late fee of $13 in 1995. The highest late fee was $39 per occurrence. In 2005, about 35 percent – over one-third – of active U.S. accounts were assessed a late fee at least once.

• Unfair Interest Charges on Timely Payments. One-third of the credit card issuers studied by GAO use a billing method that charges interest on credit card debt already repaid by the consumer. The example outlined by GAO assumes that a consumer starts a billing cycle with a zero balance and charges $1,000 on the credit card. The cardholder makes a timely payment of $990, reasonably expecting to pay interest on the remaining $10. Instead, some credit card issuers charge interest on the full $1,000, even though the cardholder had already paid 99 percent of the balance on time. While the consumer only owed the credit card company $10 for 30 days or less in GAO’s example, the interest charge was $11.02.

• Hidden Fees. Some fees are not disclosed at all in the materials provided to cardholders. For example, some issuers charge cardholders a $5 to $15 fee to make a single bill payment by telephone; others charge a $2 to $13 fee for obtaining a single copy of a billing statement or other record.

• Penalty Interest Rates Exceed 30 Percent. Some of the credit cards analyzed by GAO impose penalty interest rates of over 30 percent on cardholders who paid late or exceeded a credit limit. In one instance reported to GAO, consumers complained to a federal banking regulator about being charged an over-the-limit fee when their account balances exceeded their credit limits due solely to a late fee charged by their card issuer.

• Inadequate Fee Disclosure. GAO found that current fee disclosures are difficult to understand, bury important information, and often fail to convey to cardholders when late fees would be charged and what actions could result in penalty interest rates.

• Higher Penalty and Fee Revenues. Penalty interest rates and fees have increased as a portion of credit card issuer revenues. From 1986 to 2004, the average profitability of large credit card-issuing banks was more than double that of all commercial banks.

“There are so many credit card fees and penalties these days that consumers need a scorecard to keep track,” Levin said. “Inadequate disclosure compounds the problem. This report will help consumers and policymakers evaluate the fairness of current credit card fees, interest rates, and disclosure practices, and help build the case for legislation to stop the abuses. I hope it will also serve notice to credit card issuers that they need to clean up their act and eliminate unfair, excessive, and hidden charges.”

In its report, GAO examined cards issued by the six largest credit card issuers of 2004: Citibank (South Dakota), N.A.; Chase Bank USA, N.A.; Bank of America; MBNA America Bank, N.A.; Capital One Bank; and Discover Financial Services. The accounts of these six credit card issuers make up 80 percent of credit card lending in the United States.

The Government Accountability Office is the investigative arm of Congress. The report, Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers, is available here. [PDF]