Your shiny, new credit card just arrived in the mail, but how much do you really know about it? Do you know what kind of fees you will pay if you make a late payment, go over your credit limit, or take out a cash advance? A study published in 2008, Learning in the Credit Card Market, suggests that many cardholders learn about these fees the hard way – by paying them.
The study looked at whether credit cardholders pay fewer fees with experience. The findings showed that people with new credit card accounts paid average monthly fees of $15 and that this average decreased by 75% during the first four years.
By analyzing 4,000,000 credit card statements of 120,000 credit cardholders, the study found that over the first four years:
- The accounts paying cash advance fees decreased from 57% of all accounts to 13%
- Late fee payments decreased from 36% of accounts to 8%
- Over limit fee payments decreased from 17% of accounts to 5%
Learning, Then Forgetting
The study also found that making a late payment and having to pay a late fee reduced the probability that a person would make a late payment in the next month by 44%. The study’s authors note that people may pay more attention to their credit card accounts if they recently paid a fee, as negative reinforcement plays its part.
However, people also appear to forget with time. The study found no correlation between paying a fee a year ago and the likelihood of paying a fee now. Plus, paying a fee two years ago was associated with a 20% increased chance of paying a fee now.
Relying on New Cardholder Fees
To use some American stats as an example, according to a fact sheet released by the White House, Americans pay about $15 billion in credit card penalty fees each year. The implication from “Learning in the Credit Card Market” is that new cardholders pay many of those fees, making the opening of new accounts an important revenue source for credit card companies.
One way that the companies have pursued new cardholders is through the marketing of student credit cards – inexperienced undergraduates are often unaware of the fees involved. Credit card companies make agreements with colleges and universities that give the companies access to student information for marketing purposes. According to an October 2010 report, 53,164 college credit card accounts were opened in 2009 in American alone.
This is an important source of fee revenue for banks, and goes to show that not only do adults have to learn about fees the hard way, but we’re not sharing the knowledge well enough with our children.
Reading the Fine Print
There are generally two distinct sets of credit card information, the marketing that the card company wants you to see, and the legal information that the card company hopes you learn about the hard way.
Information the company wants you to see generally pertains to eye-catching deals like 0% balance transfer offers, or 5% cash back rewards. What they don’t tell you is that the balance transfer deals morph into higher APRs once you trip up, and that your minimum payments reduce your no-interest balances rather than your higher APR balances. And what they don’t tell you about the cash back deals is that they are capped, or are limited to certain categories, and they usually carry extremely high APRs.
When you open a credit card account, read the disclosures that come with the credit card offer. Credit card companies are required to disclose all the fees and interest rates in (relatively) plain sight. As obvious as that sounds, the research shows that few of us actually pay attention, and the alternative learning process costs us hundreds of dollars each year.
Author Bio: Tim Chen is founder and CEO of NerdWallet.com, a website that helps consumers to find low apr credit cards. Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and the Christian Science Monitor.