Warning: Penalties and Late Fees May Apply

WARNING: PENALTIES AND LATE FEES MAY APPLY….In the Washington Post, Kathleen Day and Caroline Mayer explain how credit card companies make money:

Penalty interest rates usually are about 30 percent, with some as high as 40 percent, while late fees now often are $39 a month, and over-limit fees, about $35, [Cardweb CEO Robert] McKinley said. “If you drag that out for a year, it could be very damaging,” he said. “Late and over-limit fees alone can easily rack up $900 in fees, and a 30 percent interest rate on a $3,000 balance can add another $1,000, so you could go from $2,000 to $5,000 in just one year if you fail to make payments.”

According to R.K. Hammer Investment Bankers, a California credit card consulting firm, banks collected $14.8 billion in penalty fees last year, or 10.9 percent of revenue, up from $10.7 billion, or 9 percent of revenue, in 2002, the first year the firm began to track penalty fees.

That’s a $4 billion increase in penalty revenue in two years in case you’re keeping score at home.

And you have to love this: that penalty rate of 30-40% can be imposed for missing a single payment ? in fact, in can be imposed for missing a single payment on a different account, like your telephone bill ? but a card spokesman said this was perfectly reasonable because it was “clearly disclosed on account applications.” Something tells me that their idea of “clearly disclosed” is a wee bit different from most people’s.

Bottom line: credit card companies now make half their profits from penalties and late fees. They actively seek out customers who are likely to miss payments and end up in a penalty fee spiral, and they make a fortune from them. In a normally functioning market there’s at least a small incentive to limit loans to these high-risk customers, namely the possibility that they might go bankrupt, and the bankruptcy bill before Congress is a brazen attempt to remove even that small but annoying incentive to act responsibly.

Credit card companies want the ability to make risky loans, but they also want federal protection that protects them from bearing the risk that goes along with making those loans. That’s a pretty cushy setup, as long as you can buy yourself enough politicians to make it happen. Apparently they can.