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Stop Focusing on Bank Fees, Start Focusing on Interest Rates

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Bank of America, Chase and several other megabanks made headlines toward the end of 2011 by announcing (and then renouncing) fees tied to debit card accounts. The public and media outcry over fees associated with banking related products and services even prompted Gerri Willis, host of FOX’s The Willis Report, to cut up her beloved Bank of America debit card — live on air. Point being, consumers (and anchors) don’t like fees.

The problem, however, is that we tend to focus so much on banking related fees that we forget about the most significant fee associated with banking products, which is the interest rate. I’ve long argued that the interest rate is yet another fee, just dressed differently. Let’s do some math that proves my point about fees versus rates;

The average household credit card debt is almost $16,000. Annual fees run as anywhere from $29 per year all the way up to almost $500 per year. And, the average interest rate on credit cards is now at 14.9%, depending on whom you believe.

If you made the minimum payment of $640 (which is 4% of the balance) on a card with a $16,000 balance it would take a little over 2.5 years to pay it off, assuming you stopped using it altogether. In that period you would have accrued between $73 and $1,250 in annual fees, prorated. During the same period of time you incur more than $3,276 in interest, which is 44 times the low end aggregate annual fee amount and 2.6 times the high end aggregate annual fee amount.

Some of you may argue that you’d be unwilling to pay a 14.9% rate but it’s actually right at the national average, give or take a few percentage points. If you’re carrying debt on retail store cards, you’re probably paying closer to 24.9%. While retail store cards don’t normally have annual fees, a modest $2,500 balance paid off with the minimum payment means you’ll pay over $1,000 in interest, or 40% of the original balance. All of a sudden that 20% discount on store purchases becomes meaningless.

Interest rates on credit cards have been rising over the past several quarters and nobody seems to be enraged about this. Considering that interest rates are the single largest line item cost of having a credit card, why isn’t there more outrage about rising rates? I think there are three answers that explain the silence.

Paying Interest is Avoidable

Charge me whatever interest rate you want because it won’t matter. Interest is only applied to balances that are rolled (aka “revolved”) from one month to the next. If you pay your bill in full each month, then you’ll pay a grand total of $0 in interest. Annual fees, monthly fees, and other usage fees are not avoidable — which is why they tick us off.

Interest Rate Increases Aren’t Usually Retroactive

When you opened that new credit card the rate was set based on a variety of metrics, including your current credit score. The good news, thanks to the CARD Act, is any debt incurred under that original interest rate can’t be re-priced except under a small number of circumstances. So if you’re carrying a balance at 7.9% and the issuer raises your rate to 19.9%, you’ll only pay the new rate on any newly incurred charge. Just don’t miss a payment by more than 60 days because that will allow issuers to retroactively increase your rates.

We Would Rather Pay Interest Than Fees

I think most consumers recognize that credit card issuers have to make money, as long as their tactics are straightforward. Interest is our fee for using their money, and that’s ok in my book. Banks aren’t non-profit and as long as cardholders recognize that their primary goal is to make money, I think we can co-exist.

John Ulzheimer is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry. He is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. Follow him on Twitter here.

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