The first of the $110 billion in economic stimulus checks reached taxpayers last week – either via direct deposit or through the mail.
The IRS should have added a third option: send them directly to credit card-issuing banks.
That’s because Americans have not only buried themselves under a record amount of credit card debt – $951.7 billion as of February, according to the Federal Reserve – they have also been falling further behind in paying those bills, according to credit card industry data reviewed by The Post.
The total amount of credit card debt is up 23.5 percent since 2003, according to the Fed’s numbers, while the amount of penalty fee income – which comes principally from higher interest rates after card holders miss a payment – has risen at more than twice that rate, up 54.7 percent over the same period.
Last year banks rang up revenue of $18.1 billion from penalty fees compared to $11.7 billion in 2003 according to R.K. Hammer Investment Bankers, in Los Angeles.
Stretched to the breaking point with credit-card balances, consumers are slowing down spending while being urged by many economists to pay down debt and not spend their rebate cash.
“If this is as low as rates are going to go, consumers should make hay while the sun shines and pay off those credit cards and home equity lines of credit,” Greg McBride, senior financial analyst at Bankrate.com, said.
Despite the Fed lowering rates seven times since September, credit card rates have not fallen in kind.
“Consumers are getting shafted a bit,” said Ben Woolsey, of CreditCards.com. “Banks are getting a break from the Fed, which is lowering the cost of their money, but they’re not passing along those lower rates to most customers.”
“Most consumers are loath to take on more credit at this point, with jobs harder to get and incomes being squeezed by rising food and energy costs,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, said.
One reason for the tremendous rise in penalty fees – which are charged at 27.86 percent, the average penalty rate for the top 10 banks – is that banks have shortened the average grace period to 20 days in 2007 from 31 days a decade earlier, according to data from R.K. Hammer.
And with the value of homes continuing to fall – keeping shut the home-equity loan school of lifestyle financing – look for Americans to fork over even more money this year. The delinquency rate among cardholders in the US rose to 4.55 percent last year, according to the Federal Reserve, up from 3.52 percent in 2005.
Money manager David C. Nelson is all too familiar with the penalty fee interest rate. He missed a payment on his American Express blue card and was socked with a penalty interest rate of 27.99 percent. Like most credit cards, the higher penalty fee rate will be in effect for six months.
“I thought I borrowed money from American Express, not Tony Soprano,” Nelson wrote in an essay published on Minyanville.com.
“Fortunately I have the means and immediately paid off the balance,” Nelson wrote, “but there must be millions of cardholders who need to carry a balance and for whatever reason missed a payment and are now stuck with the new juice.”