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 Americans 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 overcharge 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 where 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 ten 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 Washington is needed to restore balance to the system and return consumer finance to something that resembles a fair system.

Comments

[Wildhawk:]

Finally a breath of much-needed pragmatic realism in Seeking Alpha commentary! Mark, thank you for posting this entertaining commentary on your personal situation (your wife sounds like a pretty sharp lady, by the way).

What drives me nuts about so much of the commentary on both this site and the broader media is that government is automatically assumed to be incompetent and the free market (such as it is, which it ISN'T in American banking) is automatically assumed to be supremely omniscient in finding the perfect solution to everyone's problems.

What most commentators fail to realize, and which you've alluded to here, is that large banks in the US do not operate as part of a free market- they are oligopolies, which are antithetical to free market capitalism. They receive innumerable competitive advantages (e.g. the near-free borrowing from the Fed window; government guarantees of their debt, etc.) that bank alternatives like money market funds and peer-to-peer lending (e.g. Prosper) institutions do not have. In addition to the transparent advantages, they also clearly have the less transparent advantage of enormous influence in Washington, which has shown a propensity to do whatever big banks ask them to do, regardless of consequences. This, my friends, is not a free market, but crony capitalism where the oligopoly has all the advantage over the consumer. This is a classic situation where government MUST step in to break up the oligopoly and restore balance to the relationship between banks and consumers where none currently exists. It's precisely why anti-trust and consumer protection laws were enacted.

Oct 04 09:37 AM

[john s. gordon:]

crony capitalism wins as usual.
> jack

Oct 04 10:58 AM

[Tom Armistead:]

Somewhere in there these same large banks got themselves a federal exemption to the operation of state usury laws.

Your focus on the interest rate only limits the scope of your article. My wife handles the credit cards, and she found a tendency for them to claim late charges which they were not entitled to, or even to delay cashing/posting payments in the interest of getting a late fee and an interest rate upgrade. Frequently they were quick to back down when challenged.

It is not surprising that the banks resist the idea of a federal consumer protection agency. After all, they used the federal government to do an end run around the protections the states had enacted.

In point of fact many credit card issuers are predatory - they are trying to do a modern version of the "company store" strategy. As a matter of public policy, consumers whose entire income is devoted to paying interest and late charges cannot create any demand for goods and services.

Somthing needs to be done.

Oct 04 12:10 PM

[lower98th:]

And why is it that credit card securitizations, whose nominal "balance" might be 300% more than the total of original purchases (gotta love interest, fees, penalties), are "risky?"

Credit card holders feel cheated. And that takes away the moral hazard of default.

Oct 04 01:46 PM

[sethmcs:]

Credit cards "take it or leave it". I'll leave it. Not only do credit card companies screw their customers with incomprehensable fees but you should see what they do to merchants. The kindest thing you can do for merchants that you buy goods from is pay cash. Remember cash isn't heavy.

Oct 04 03:04 PM

[THofler:]

I won't add to the rant about bankers. I think the more interesting point here is the possibility (or likelihood) of frequent small dollar rip-offs.

Over a period of more than 6 months, my wife noticed that the local supermarket was overcharging on some items. The chain had a policy of "the item is free if we overcharge you." The clerks were not always pleasant or expeditious in price checking (my wife was always correct), and sometimes there was resistance to the no-charge promise.

I suspect we got 50 to 100 free items over time. I don't believe there was ever a case of an undercharge. The scam was that that items got marked down at the shelves in the morning, but the computers didn't get updated 'til later in the day. Eventually, the state of CA busted the company and imposed a big fine.

Oct 04 03:43 PM

[Wez:]

Credit card companies routinely overcharge, it's common knowledge. They will "graciously" "correct" their mistake if you call them on it, which means they keep about 95% of those mistaken charges.

Oct 04 06:46 PM

[a. palmer jr.:]

Something else to watch out for: My wife sent me downtown to fill up our gas can for our lawnmower. Our can holds 5 gallons and gas was at the time 2.29 a gallon. I put what I thought was about 4 gallons in the can (quite a bit of space between the top of the gasoline and the top of the can) and looked at the pump and it said 5.32 gallons! That means my 5 gallon gas can holds approx. 6 1/2 gallons or the pump is wrong. Anyway, it came to 12.20 which I'm thinking I got overcharged approx. 2.00. I think I'm going to find a calibrated gallon jug and pour the gas out and check to be sure.

Oct 04 08:37 PM

[BerkeleyBob:]

I've noted some similar problems with my gas company's credit card, now apparently handled by GE Credit. A way out is to put your checking and savings account with a credit union, which generally give their customers a fair shake.

Oct 04 11:46 PM

[Angry Banker:]

You say "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."

It is a real choice. If you don't understand the terms of a contract, then don't get the card.

Nobody forces someone to take a credit card, max it out, or make late payments. These are choice people make and when they are unhappy with the charges that are actually defined in the fine print (which by the way are written by lawyers trying to comply with the ridiculously over-complex disclosure regulations), they cry "foul"!

Me, I use credit cards as transaction devices only. I pay off the balance every month and if there is ANY charge beyond the repayment of the amount I spent at the retailer, I call to have it corrected. Although I must say this has only happened to me once or twice in the last five years.

Oct 05 05:19 PM

[HZLIU:]

You are not alone. I got some financial charges from CitiCard that my calculation could not come close even with my strong math background. Here is the excerpt of my e-mail send to CitiBank. “In July statement due 8/5/09, I left $31.35 on the balance. I paid $1762.29 on 8/1/09. On 8/11/09, I made a purchase at $2615.75. On 8/18/09, when I received Aug statement due 9/9/09 and found out the purchase financial charge for $21.45, I paid off entire balance $2668.55 and extra $100.00 for any future financial charge on the financial charges. I have purchase rate 16.99% APR, 0.04655% daily.
From 8/11/09 to 8/18/09, total 7 days, the financial charge for the 8/11/09 purchase is $2615.75*7*0.04655%=$8...
From 8/5/09 to 8/18/09, total 13 days, the financial charge for the unpaid balance from July statement $31.35 is $31.35*13*0.04655%=$0.19.
In total, the charge should be $8.52+$0.19=$8.71. Please show me how Citibank calculated the charge and came out $21.45. Since then I used credit card as debit card and tried to avoid any more charge on the financial charges. But In Sept statement, I again had financial charge of $0.88. I have completely no idea how it got calculated.”

I first got an automatic e-mail reply with the method how Citicard charges which is the same method I used to do the calculation. I send 2nd e-mail and requested them to do the calculation for me. The reply e-mail asked me to called in. I called the rep still not be able to tell me exactly how they did the calculation but promised to send a letter of explanation. Two weeks passed, I have not received any letter. I wonder how many people ever try to calculate the financial charge and see whether it is matched.

Oct 06 08:32 PM