August 12, 2009
-
The other side of the Credit Card Coin, Pt. 1
Now what?Well, the other side of the "good news" reported in my yesterday's article ("Finally, Some CC Relief -- No more over-the-limit fees") is surfacing already. We thought it so generous when Amex and B of A announced they were curtailing "Over-the-Limit" penalties on credit cards. Of course it didn't require a rocket scientist to link this offer with the timely threat that Congress" requirement to justify penalties as "reasonable and in proportion" to the infraction. All credit card lenders will be required to meet this requirement before month's end. These two credit card issuers were the first to make such an announcement but what was curious was the optional attachment that came with it.
That attachment was the option that, if consumers opted, they could still agree to pay the $39 penalty. Sounds nuts, doesn't it? Who in their right mind would voluntarily opt for a penalty? My article went on to explain some background. The way these penalties evolved in the first place goes back to the way things were over 20 years ago. Back then, if a consumer would attempt to charge their credit card for more then the "option-to-buy" (the amount of credit left on the card), the transaction would simply be denied. This was, oftentimes embarrassing and very inconvenient. So, as a service to their credit card holders, the issuing bank started offering the grace to allow charging a little over the amount left on the card (5% - 10%). This convenience, of course, came with a minimal fee (typically $10). Almost everyone wanted it and so, it pretty-much became the standard.
Over time, however, some of the lenders (if not all) became greedy and realized there was good profit to be made with this feature if they just kept raising the penalty well above what it would cost them for the added risk. It got to the point where the abuses became excessive and overburdening to our nation's hard-pressed credit card consumers. Finally, Congress aggressively put a stop to it (soon to go into effect).