GAO study slams credit card fees, disclosures
By Ellen Cannon • Bankrate.com

It's not just the consumers' fault that they don't understand the terms of their credit cards, the Government Accountability Office said in a report issued Oct. 11.

The 114-page GAO study said that because credit cards now have a range of interest rates and fees, the disclosure needs to be expressed in a clear and more understandable manner. The report was requested by Sen. Carl Levin, D-Mich., in response to the complex fees and rates that credit card issuers charge.

"Millions of Americans depend on credit cards to pay their bills and buy essentials like groceries or gas," Levin said in a press release. "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."

For the study, six large credit card issuers provided data on interest rates and fees paid. Their data showed that in 2005 nearly 80 percent of their accounts were assessed interest rates of less than 20 percent, and more than 40 percent had rates below 15 percent. However, they also reported 35 percent of their accounts paid late fees and 13 percent paid over-the-limit fees.

Complex wording
The GAO employed a usability study to analyze credit card disclosure, and it concluded that "disclosures from the largest credit card issuers were often written well above the eighth-grade level at which about half of U.S. adults read."

In addition, the GAO interviewed 112 cardholders and said they were unaware of key aspects of their credit cards, including what the late-payment fee would be and why the issuer could raise their rates.

The report also cites various practices that consumer groups have sought to have banned, such as universal default (where a cardholder's interest rate can be changed based on behavior with another creditor, such as a utility company), payment allocation (where the payment is applied to the low-interest balance before the higher-rate balance) and "trailing" or "residual" interest (where cardholders are charged interest on balances they've paid the previous month).

Another finding in the GAO study was that issuers are moving away from charging over-limit fees. In 2003, 85 percent of the cards surveyed charged over-limit fees, while only 73 percent did in 2005. Issuers said that they are pursuing "competitive strategies that seek to increase the amount of spending that their existing cardholders do on their cards as a way to generate revenue." Usually, if cardholders were near their credit limits, they would be more likely to stop using those cards.

Fees, fees, more fees
If issuers were not enforcing over-limit fees, though, there are certainly enough new fees being charged, according to the report. The majority of the most popular cards now charge fees for cash advances, balance transfers, foreign transactions, telephone payments and duplicate copies of statements.

"There are so many credit card fees and penalties these days that consumers need a score card to keep track," Levin said in a release. "Inadequate disclosure compounds the problem. I hope (the report) will also serve notice to credit card issuers that they need to clean up their act and eliminate unfair, excessive, and hidden charges."

"Every day, people's lives are ruined when credit card companies triple or even quadruple the interest rates on their existing credit card balances," said Linda Sherry, director of National Priorities for Consumer Action, which provided historical data for the study. "If people are having a little trouble paying on time, how does it help to suddenly hit them with 30-plus percent interest rates and steep increases in minimum monthly payments?"

Consumer groups' reactions
Consumer Action, Consumers Union, Consumers Federation of America and U.S. Public Interest Research Group issued a joint press release in which they welcomed the report, but said they hoped the government would go further and ban some of the anti-consumer practices. "Consumer Action is hopeful that this excellent report will be a wake-up call to Congress and federal bank regulators that things need to be changed to protect consumers from abusive industry practices," said Sherry in an e-mail message.

"We are pleased Sen. Levin requested the report, although we are disappointed that it contains very little new or privileged information," said Sherry. "We had expected the GAO to use its power to get at real behind-the-scenes information, such as the exact amount of money the banks make off fees and the relation of those fees to the actual costs borne by the banks and the current market shares of each national bank. Some of the information appeared to us to be rehashed.

"Nonetheless, we welcome any opportunity to shine light on the industry's anti-consumer practices."