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Banks Don’t Intentionally Overcharge Credit Card Customers…Or Do They?

Have you ever tried to recal­cu­late the finance charges on your credit card bill?  I am bet­ting that few American’s know if their bank is over­charg­ing them or not. 

I have to con­fess, for the last 28 years I was one of the peo­ple who trusted my bank and didn’t bother to check the inter­est cal­cu­la­tion.  After all, in 1966 when I opened my first bank account my mother told me that I could trust my bank and that they would never try to rip me off. 

But, this month my wife (she is a lot more atten­tive to details than me) appeared at the door of my home office (where I was busy watch­ing a foot­ball game) and demanded that I recal­cu­late the inter­est on one of our credit card bills.  Of course I didn’t want to do it.  How­ever, after a lot of spousal push­ing (and dur­ing half time) I did what I was told.  And, guess what?  My wife was onto some­thing.  When I looked at the bill I was able to quickly con­firm that we had been over­charged.  The amount wasn’t much, $4.57, but then again, since we had a $0.00 bal­ance sub­ject to finance charges, $4.57 seemed like a lot. 

On Mon­day my wife called our bank and they imme­di­ately admit­ted their error and reversed the charge.  But, the over­charge on one credit card bill made me won­der; could we be get­ting over­charged on all our credit cards and how would we know? 

So, I got the other credit card bills from my wife (she takes care of all of the finances in our fam­ily and pretty much every­thing else that is impor­tant).  I dis­cov­ered that despite pay­ing the entire bal­ance each month on our other cards we still were incur­ring finance charges.  So, I read the rules on the back of the credit card bill.  While I am a trained attor­ney, I haven’t prac­ticed law in a while and am rusty in the arcane art of inter­pret­ing legal hiero­glyph­ics.  It took me a lit­tle while to deci­pher the credit card agree­ment and after work­ing on it for about an hour I still wasn’t sure what it meant.  My wife was much quicker (after all, she is much smarter than me).  Within sec­onds she told me that the agree­ment meant that they could charge us when­ever they wanted, in any amount and for any rea­son.  Basi­cally, the credit card agree­ment was a con­tract that allowed the bank to take our money when­ever they felt like it with legal impunity. 

My wife warned me not to waste my time try­ing to recal­cu­late our finance charges because of the lan­guage in the con­tract. But, being a guy and need­ing to assert my mas­cu­line inde­pen­dence, I decided to give it a try any­way.  So, I took out my com­puter and used a spread sheet to cal­cu­late the aver­age daily bal­ance that was sub­ject to finance charges.  After 30 min­utes I couldn’t even come close.  I thought that the finance charges should be a lot lower than my bank said they were.  But, because of the lan­guage in the con­tract I couldn’t be cer­tain that I was being over­charged which meant it was unlikely that we would win an argu­ment with the bank. 

I am pretty sure that unless the aver­age daily bal­ance is $0, or below, there isn’t a way to prove if you are being over­charged and any argu­ment with the bank will be fruitless.

So, let’s go back to the $4.57 over charge that my wife noticed.  I don’t think that it was an iso­lated inci­dent.  After all, com­put­ers don’t have brains.  They can’t sin­gle out peo­ple to over­charge.  They don’t hate par­tic­u­lar cus­tomers.  And, they don’t know that they are over­charg­ing.  Some­one had to pro­gram the com­puter.  It only fol­lows instruc­tions. 

I won­der why the cus­tomer ser­vice rep­re­sen­ta­tive was so quick to admit that the com­puter over­charged us and refund the $4.57.  Did she know why we were over­charged?  Had man­age­ment told her to give quick refunds if some­one was actu­ally able to fig­ure out that the cor­rect finance charge?  Was the over­charge intentional?

Why should I trust my bank to not over­charge me?  The finance charge rules are writ­ten to be incom­pre­hen­si­ble so that with­out warn­ing or rhyme or rea­son I may be charged over­draft, ser­vice and other fees that are based upon the bank back­dat­ing and reclas­si­fy­ing trans­ac­tions.  Large banks haven’t proven them­selves to be hon­est cor­po­rate cit­i­zens in the last few years. 

Most con­sumer finance con­tracts seem to be con­tracts of adhe­sion, con­tracts with one side has no nego­ti­at­ing lever­age and the other side dic­tates the terms of the legal and finan­cial rela­tion­ship.  Indus­tries based upon con­tracts of adhe­sion are text book exam­ples of sit­u­a­tions when there is an appro­pri­ate role for gov­ern­ment to rep­re­sent­ing the inter­ests of con­sumers and make sure that they aren’t being ripped off. 

Per­son­ally, I would love for our lead­ers in Wash­ing­ton to take any 10 ran­dom credit card bills and, with­out the ben­e­fit of their staff, try to fig­ure out what the finance charge should have been and com­pare their answer to the banks actu­ally charged.  I am will­ing to bet that there isn’t a sin­gle Con­gress­man, Sen­a­tor or White House aide that will even get close.  Then, these gov­ern­ment lead­ers should look at the rules and reg­u­la­tions gov­ern­ing the inter­face between banks and con­sumers and see if more is needed.  I think that more reg­u­la­tion is des­per­ately needed so that con­sumers can under­stand what banks are charg­ing them and why and be able to exer­cise choice. 

Con­sumer credit cards and many other forms of con­sumer finance are not nego­ti­ated in fair and free mar­kets because they aren’t nego­ti­ated at all.  Con­sumers have a take it or leave it choice and since most con­sumer don’t under­stand the terms of their con­tract the choice of take it or leave it isn’t even a real choice.  Econ­o­mists and reg­u­la­tors shouldn’t pre­tend that the invis­i­ble hand of mar­ket dis­ci­pline will fix any­thing.  And, since indus­try con­cen­tra­tion has increased over the last few years mar­ket dis­ci­pline has got­ten even worse.  More help from Wash­in­ton is needed to restore bal­ance to the sys­tem and return con­sumer finance to some­thing that resem­bles a fair sys­tem.  


Posted in: BANKS, economy, Finance, Politics, Public Policy, REGULATION, Regulatory Reform

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