Friday, May 22, 2009

Never Pay a Credit Card Late Fee Again

I have been reading Nudge and I had to make my pitch for behavioral economics since I am taking a short break from knitting.
Here’s my nudge suggestion that I think would reduce and possibly mostly eliminate late credit card payment fees for consumers and provide a win for card issuers, too. (not that they need it!).
Make the “default” method of payment for credit card bills the “auto-pay” option which many, if not all, credit card companies offer. Among the auto-pay options, make the default, the minimum payment.
Most, if not all, credit card companies allow for payment by an “automatic deduction” or “auto-pay” (there are other names for it) from your checking or savings account. This is NOT online banking (where you have to “push the button” to initiate the payment). (Online banking is not foolproof. If you forget to initiate the payment, it doesn’t get made. If the credit card company changes the date the payment is due and you don’t catch that piece of information, the payment is late, online banking or no online banking. OK, I’m not a fan of online banking.)
You fill out a form with your checking or savings account number on it, your signature, etc. giving the credit card company “permission” to deduct the payment from your account each month. This is a pre-determined deduction/payment (usually around the same day each month) from your checking or savings account for payment of the credit card bill. The deduction/payment can take 1 of 3 forms:
  1. (default choice) You can choose the minimum payment to be deducted from your account each month
  2. You can choose a fixed amount as long as it is above the minimum payment. Otherwise, it will be the minimum payment.
  3. Or you can request that the entire balance each month be deducted from your account.
At any time during the month, the consumer can send additional payments toward reducing the balance.
Here are the facts:
  1. Most consumers are already paying the credit card bill with a check so a checking or savings account exists in most cases. True, some people may be using a cashier’s check or going to the bank with cash and may not have a checking account, but I would suspect the majority of people mail the check to make the payment.
  2. By using the “auto-pay” method, checks NEVER arrive late. Consumers never forget to pay the bill. Checks don’t get lost in the mail. Credit card companies always get the payment (unless there are insufficient funds in the account).
  3. Consumers are protected should they go on vacation, out of town, get sick, etc. and neglect to pay the bill.
  4. Consumers are protected should the credit card company move the PO Box where payments go and now it takes more time for their payment to reach the PO Box and now the payment is late. This doesn’t happen with “auto-pay”.
  5. Consumers are protected if the credit card company changes the date due or shortens the time between billing and payment due.
  6. Consumers are protected from checks being “lost in the mail or delayed because of inclement weather, natural disasters, or holidays”. With the US Postal system currently operating under large financial stress, this may increase.
  7. If you are signed up for the “auto-pay” option, the credit card company will never be able to say your payment is late, unlike if you pay by online banking since THE CREDIT CARD COMPANY is in control of deducting the money from your account to pay the bill.
  8. Consumers will never pay a late fee if they use this option and have sufficient funds in their account
The banks/credit card issuers would not earn as much from late fees, but I suspect default rates on credit cards would decline if the agreed upon monthly payments were automatically deducted from the consumer’s account.
While I don’t have data to support this, (but I am certain somebody does) my guess is lower default rates would:
1. Offset the loss in revenue from late fees, and
2. Generate more revenue overall. If people weren’t spending money on late fees, they might put that money toward keeping their credit card bills current.
I believe that before the current economic crisis, the default rate on credit cards was 6%; I don’t know what the current rate is now, but I know it has risen along with unemployment rates. If an incentive (lower interest rates or higher credit limits, perhaps?) were given to the consumer to choose the default, “auto-pay” option; both sides win.
As you may suspect, my husband and I have been paying our bills this way for many years. In addition to saving lots of postage (!), we have saved ourselves a lot of worry. We now pay the majority of our bills this way: our utilities, our insurance premiums, credit cards, etc. are all deducted from our checking account every month. Several weeks before the deduction we receive the bill, we look it over and then I write the amount to be deducted in the check register (I’m old fashioned). Some of my friends just wait for it to show up on their bank statement. Nothing gives you more peace of mind when you go out of town than to know that your bills will be paid whether or not you are there to do it.
This is my nudge suggestion.


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