Credit Card Charges
By admin • Nov 3rd, 2006 • Category: Credit Cards
A return to form
Some years ago annual fees on credit cards were common. Today as the credit card companies compete amongst themselves for consumer business with zero percent enticements most annual fees have disappeared. Now, as a result of what the industry regards as lost income through consumer fickleness the threat of annual fees is back.
We’ve looked at a group of cards provided by American Express, some of which incorporate a fee into their benefits package and ask, are the annual fees worth it? And do all lending companies re-coup their “losses” by penalising users who step out of line?
An Alliance
In the Summer of 2005 American Express and British Airways announced they were going to continue the British Airways American Express credit card scheme. They now offer three cards under this heading: the basic card, the British Airways American Express Premium card and the Express Premium Plus card. The Premium Plus card has an annual fee of £120.
This is admittedly very high compared to most annual fees of “lesser” cards. Even others in the Amex group where an annual fee is charged it is either £30 or £60. So, why the difference?
The intention is clear
The picture becomes clear when you look at the figures for total charge for credit and interest on each of their cards.
This figure is arrived at by adding together the interest charged and an annual fee. It’s based on borrowing a sum of £1,500 which is repaid in equal monthly instalments over the period of one year, but does not take into account any separate promotional incentives that may be run on any particular card.
The three basic cards in the American Express range have charges totalling between £123.72 and £152.81. The Premium cards vary from £123.72 to £140.79.
All very similar, when you consider that the cards annual fee varies from £30 to £120! So basically you either pay more in annual fees or you pay more in interest. Either way the company, makes sure on this sum that a user of any of the six cards is going to get charged between £120 - £150 for the pleasure of using the card.
But I hear you say, what about the other benefits to the user? Yes, these cards award 1.5 BA miles in return for every £1 spent on the card. Good value? …. Possibly, If you compare it to the Air Miles credit card which gives only 1 Air Miles point for every £20 spent on that card.
Is it worth It?
The bottom line is that any card such as this one from the American Express and British Airways alliance will be of benefit to the user and worthwhile if the user already purchases what the credit card company is offering. In the case of these cards, the premium cards are aimed at small business use, so a fee of £120 isn’t going to break the bank and small companies whose employees do a lot of air travel are likely to jump at these cards.
What they do illustrate however, is that the credit card companies have carefully calculated the expected returns from each of their products. After all these are financial institutions, unlike most of their consumers they understand how to make money! They are not charities and they have reams of data telling them how much money they can expect to make from each of their products.
Punish the offender
The variable for all credit card companies is the way each user actually uses their card and do they love it when somebody steps out of line and doesn’t pay on time, or goes over their credit limit!
In early 2003, The Office of Fair Trading launched an investigation into the penalty charges levied by credit card companies to establish whether they were in fact “excessive”. Despite findings that indicated the fees of £20 and £25 charged to the consumer were greater than the costs to the lender of such defaults, it appears many credit card companies continue to charge what they like, as quite a few still charge these high rates.
Unenforceable?
Speaking in 2005, barrister Richard Colbey from Lamb Chambers declared that “Credit card penalty charges are legally unenforceable because they seek to punish the borrower rather than compensate the bank for any losses that they have suffered as a result of the unauthorised borrowing”
Perhaps this explains why if you have omitted to pay on time or accidentally exceed your limit the credit card companies are usually willing to repay part of the penalty incurred. But they will never waive them completely.
