Wed 14 Apr 2010
President Obama signed a legislation last year that brought around many changes to the Credit Card companies and users. Starting early this year, the credit card companies need to comply with a new set of rules. From now on, credit card companies cannot raise interest rates on purchases you already made on your existing balance. The bank won’t be able to charge you for spending more than your credit limit any more. The credit card bills will be more user-friendly, with the payments due on the same day each month and the consequences of paying just the minimum monthly payment clearly printed on it.
From now on, banks will need to send you a minimum 45 days prior notice before raising cash advance and late fees. Mandatory fees (like the annual or application fees) should be less than 25 percent of the credit limit, a rule that puts an end to the credit card company’s pursuit of people with poor credit histories.
The new rules are going to make it increasingly difficult for students to get credit card. For a start, no one under the age of 21 can get a credit card unless they have a co-signer or offer substantial proof of their ability to repay the debt. This move assures that no irresponsible student ends up having a large loan on his credit card without any means of repaying it. However, there’s one fee that has not been curbed, in spite of drawing serious flak from numerous customers for over a decade. Of course, we are speaking about the foreign transaction or currency conversion fee, a fee that earns several million dollars annually for the credit card companies.
This is how it works. Whenever a customer processes his/her credit card outside the United States, the bank charges a 3 percent processing fee. International travelers are affected the most. Even shoppers buying items on the web may have to cough up this processing fee to the banks. Considering the fact that the banks don’t have to do much to convert foreign currency into dollars, the 3 percent charge seems a little too steep, even as it is aimed for the business travelers and upper-middle class vacationers. The problem is that if lots of people end up paying this amount without noticing or with irritation, the credit card companies shall look forward to charge right on with this scheme. The banks, which have lost a great deal owing to laws like the Credit Card Act, shall also look forward to raise this fee further up.
Companies like Visa and MasterCard generally charge the bank issuing the credit or debit card a 1 percent fee on every currency conversion performed. The banks pass on that cost to the customers, feeling free to add some more fees for themselves. Until some time ago, this money had to be paid for every purchase not done in dollars. Nowadays, Chase, Citibank and Bank of America charge a 3 percent fee for this purpose. American Express charges 2.7 percent, with the heavy duty corporate card users getting some benefits.
Things started getting complicated when banks started to charge the customers for any transactions done outside the U.S., irrespective of whether it is done in dollars, Euros and pounds. The levy can be charged even if you are inside the United States. Fees can be charged for any airline that processes their ticket transaction outside U.S., or any website that hosts itself outside the U.S. In any case, you probably won’t find out about it unless you see it in the bill.
The banks have cited the expense of fraudulent transactions as one main reason for incurring the transaction fees on their customers. Fraudulent transactions happen more outside the United States, so the banks have a point here. The Nilson report says that for every $100 in total transaction volume on American credit cards, around 7 percent is fraudulent. However, credit fixing companies said that the fraudulent costs by the bank are nowhere as high as the 3 percent fees levied by the banks.
Many people are now beginning to question the banks’ steep 3 percent fees. Joe Brancatelli, who runs the joesentme.com site for business travelers, said “Every time there is a fee involved, they say that you have to accept that there is the potential for fraud here. How many times are we going to pay for that?” In addition to fraudulent customers, the card companies have also cited a higher volume of calls from confused customers outside the U.S. as another main reason. As good as that might be, experts say that the major portion of the fees is pure profit. In one of the many lawsuits (Schwartz vs. Visa) that led banks to disclose these earnings prominently, it was revealed that Visa had $6.9 million in multicurrency conversion costs for American cardholders and $630.1 million in currency conversion and related revenue between the timeline of February 1st, 1996 and December 31st, 2000.
If you don’t wish to contribute towards the credit card companies’ bottom-line, here is what you should do: Whenever you are taking a tour outside the United States or purchasing an item from outside the country, keep your Visa, MasterCard or American Express credit cards safe inside your pocket. Instead, use the Capital One credit card, which charges nothing for outside transactions. Or the Schwab Invest First Visa, which works in a similar way. You can look for cards from smaller banks or credit unions who work the same way. Capital One’s president informs that the company hopes to build up customer loyalty by covering the costs on the customers’ behalf. If you are planning a trip outside the U.S., you may also call the banks to learn whether or not they shall be charging you money on ATM transactions as well. There are a few banks who waive this cost for the benefit of the user.
Everybody loves the reward points on the American Express Credit Cards. But while you are traveling abroad, keep them in your pocket. Unless there is a huge shift in customer loyalty when traveling outside the United States, the foreign transaction fees is unlikely to fall.