In a BusinessWeek article titled, “Cap One’s Credit Trap,” writer Robert Berner explores how Capital One profits by lending to subprime borrowers and cashing in on high late and over the limit fees. His findings provide a disturbing insight into Capital One’s credit card business, and that of the credit card business as a whole.
Capital One credit cards aren’t as funny as their television commercials make them appear. In fact, their no hassle rewards program seems ironically titled given the hassles Capital One credit cards caused one family. Over the course of four years, this family received seven Capital One credit cards with credit limits ranging from $200 to $700. With such low limits, it is easy to see how a very simple mistake could trigger an over the limit fee.
For example, assume you’ve got a credit card with a $200 limit. You start by spending $140 on groceries and another $40 for a tank of gas. A few weeks later, you pull up at the gas station and fill your tank with $22 in gas. You’re now over the limit and the recipient of a $25 or higher late fee. Ouch. Now imagine doing that seven times. For the family mentioned in BusinessWeek, that is exactly what happened. With their balances mounting from over the limit fees, they became unable to keep up with payments. At one point, this couple was paying over the limit fees and late fees amounting to over $400 a month! This was more than the limits on many of their cards.
While Capital One credit cards were singled out in Berner’s article, many other credit card companies engage in similar practices. As consumers, it is important to know as much as possible about the Terms and Conditions linked to our credit cards. For those with marginal credit, just getting a credit card can be an important step in improving credit scores. But with low limit credit cards, the chances of going over the limit and getting hit with high fees increases tremendously.
Ultimately, it is our responsibility to manage our credit wisely. Otherwise, credit card issuers will not hesitate to take as much money out of your wallet as possible.