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$0 balances could get costly -- credit card customers
who pay off their bills could be hit with penalty fees

Convenience shoppers may have to pay fees A New York Congressman has introduced legislation to head off moves by credit card issuers to start charging extra fees to customers who pay off their card balances each month.

Credit card industry analysts and consultants say that more credit card companies are looking at collecting the penalties from so-called "convenience users" -- people who avoid paying a dime of interest by regularly paying their bills in full.

The pending bill
Rep. John J. LaFalce, D-N.Y., introduced a bill Aug. 5 that would make it a violation of the Truth in Lending Act for any credit card issuer to cancel a credit card account or impose new fees or charges solely because a cardholder maintains a $0 balance.

"At a time of escalating consumer debt and record levels of credit card delinquencies and personal bankruptcy, the banking industry should not engage in actions that discourage responsible use of credit and reduction in credit card debt," LaFalce said in a press release. "The practices ... are discriminatory, they are unfair to consumers and they are wrong."

The penalty charges would range from annual fees of $20 or more to $1 to $2 minimum monthly finance charges, experts said.

"Credit card companies aren't stupid. They're in it for the money. If you're unprofitable, they're going to charge you to the point that you're profitable," said Peter Davidson, executive vice president of Speer & Associates, a financial services consulting firm in Atlanta.

Profits have been down
The credit card industry's profitability has been slumping for years and card issuers have tried everything to encourage customers to charge more and to carry balances. They added rewards. They lowered rates. They waived annual fees as well as the occasional monthly payment.

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But those carrots aren't working for many users, said Lee Spirer, principal in the financial services group of consulting firm Booz, Allen & Hamilton in New York. Now issuers are preparing to wield the stick of more fees for cardholders.

"They'll revolve, they'll get charged, or they'll leave," Spirer said. "No cardholder is better than a negative (one)."

Where the income lies
Not every convenience user is deemed unprofitable by card issuers. Exceptions include big spenders and customers who do a lot of business with the financial institution.

Merchants pay credit card issuers about 1.5 percent of each customer transaction in interchange fees, which can mean nice profits if a customer charges enough. Because of this, big spenders who charge and pay off more than $1,000 a month are likely not to be penalized.

In addition, banks and other card issuers are less likely to charge a fee to convenience users if they have other accounts -- such as checking, savings or other deposit accounts.

If the practice should become widespread, many, many people could be affected. More than 38 percent of American households say they pay off their credit card bills each month, according to PSI Global, a market research firm based in Tampa, Fla.

The other side of the debate
However, proponents of fees for convenience users also site fairness as the basis for their arguments. They argue that it's time convenience users pay their share for the credit card services they are using.

"They don't pay fees. They don't pay anything. It's the only free lunch in town," said Stuart Feldstein, president of Hackettstown, N.J.-based SMR Research Corp.

"The idea is everyone who uses a credit card should have to pay some portion of the cost of providing this service. It's the convenience users who are best able to pay and yet they pay nothing."

The effects of competition
No action is expected to be taken on the bill until next year, but even if it doesn't pass, at least one analyst believes competition in the industry will help keep a check on fees for convenience users.

"It's a wait and see," said credit card consultant Michele Turkel, president of Turkel International Consulting Inc. in Scarsdale, N.Y. "Will these banks get away with fees for convenience users? Not when there's so many competitors not charging."

In the meantime, convenience users would be wise to take a close look at their credit card bills. If they find a fee, call the issuer and try to get it removed. Those with multiple accounts at the financial institution should be especially persistent.

If the answer is no, cardholders should consider taking their business elsewhere. There are plenty of issuers out there who don't charge such a fee.


-- Posted: Sept. 14, 1998

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