In Defense of Credit Card Fees

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Felix Salmon, a blogger at Conde Nast Portfolio, really didn’t like my Christian Science Monitor article on why the Fed shouldn’t impose more restrictions on credit-card issuers and consumers.

In fact, he found it so bad that it should never have been published at all. He even compares it to a piece arguing that the Earth isn’t round.

But he doesn’t offer anything of substance to back up his invective. First, Mr. Salmon calls my piece “disingenuous and slippery,” with no further explanation of why it’s either.

Then he spends a few paragraphs quoting an opposing piece (by George H.W. Bush speechwriter Mark Lange), which ran alongside mine in the CSM. Mr. Lange’s piece does not refute anything in my article — it just catalogs so-called predatory practices of card issuers, then summarily states that more regulation and legislation are needed.

Next, Mr. Salmon accuses me of “setting up straw men.” His example is my claim that credit-card companies should be allowed to recoup their costs through fees and interest charges. He writes: “The recouping-the-cost bit is fine, it’s the making-$19-billion-a-year [through fees, etc.] that people are having an issue with.”

But wait a minute. The Lange op-ed only said that banks — all of them, combined — will be “pulling in” $19 billion from “late fees, overlimit charges, and other penalties” this year. Mr. Salmon implies that these amounts comprise a windfall for credit-card issuers. But where is his evidence for that? Banks also lose huge amounts from defaulting deadbeats. Is Mr. Salmon saying that the fees and penalties vastly outweigh these amounts? He doesn’t elaborate — for some reason, $19 billion in fees is just too much.

Anyway, even if that $19 billion were pure profit, who is the Federal Reserve, let alone Mr. Salmon, to establish the appropriate amount of profit for an industry to make? Would $18 billion be okay? $1 billion? Or must all businesses be regulated and taxed until they make $0 from activities Mr. Salmon personally finds unsavory? Salmon offers no analysis — he just really hates credit card fees, and that’s supposed to be enough to justify government action.

Salmon continues:

Huebert would have you believe that there’s a cross-subsidy going on, and that people who suffer large penalty charges end up subsidizing those who pay off their balance every month. He says that he and people like him “deliberately game the system” by not paying any fees, and implies that the credit card companies lose money on him.

But they don’t, of course: they just make money the old-fashioned way, by charging merchants a percentage of the sale price.

I don’t know why Mr. Salmon considers merchant fees to be “the old-fashioned way” for credit cards to make money — this has never comprised the majority of the major cards’ revenue. Finance charges have long been the greatest source of revenue, followed by cash-advance and penalty fees, followed by merchant fees, followed by annual fees.

And so what if fees edge out finance charges this year as the companies’ largest source of revenue? If you want to be 100% certain of avoiding such fees, but lack the self-discipline to pay timely each month and follow the rules, you can of course choose not to have a credit card at all — they’re nice to have, but not essential. If credit cards are really so bad for consumers, word should get out that they’re not worth having.

As for whether the banks can make enough in merchant fees to profit from people who take advantage of a 0% APR, that’s questionable. Merchant fees are just 2 to 3 percent of an item’s purchase price, and balance transfer fees are capped at a certain amount, so the bank may make even less from those.

Anyway, whether the bank does or doesn’t make money on those deals isn’t important from the consumer’s perspective: the point is that consumers can take advantage of credit cards’ many benefits at no cost to themselves. All it takes to avoid pitfalls and alleged abuses of the card companies is a little self-discipline.

We have now examined Salmon’s entire argument — the rest is merely a complaint that a newspaper would run a piece challenging the view he holds.

So read my article, read his blog post, and decide for yourself who’s being “disingenuous.” And if you want to know more about how credit card companies make their money, check out Paying with Plastic, the definitive work on the history — and greatness — of credit cards.

7:15 am on August 20, 2008