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This text is coming to you reside from John F. Kennedy International Airport, where I’m waiting for an early-morning flight.
There’s a crying baby nearby, not one of the in-seat power outlets work, and the terminal is so cold that I’m considering putting on a second sweatshirt. Attendants come over the intercom every 30 seconds to yell at people. Also, did I mention the smoothie I’m drinking cost $10?
It makes me long for personal lounge access, which I’ve heard comes as a perk with some high-end bank cards. Nothing in my puny portfolio — which incorporates an American Express Blue Money Preferred and a Chase Sapphire Preferred — offers that. But nevertheless, they don’t cost me much to have. All my annual fees are under $100.
Come to consider it…
Why do some bank cards have annual fees?
The reply has to do with the Credit Card Accountability Responsibility and Disclosure Act of 2009, otherwise often known as the CARD Act. The sweeping law beefed up a ton of consumer protections and “modified the landscape of the bank card market,” based on the Consumer Financial Protection Bureau.
The CARD Act altered several formerly-common industry practices, including prohibiting double-cycle billing, capping late fees and requiring latest bank card customers to be no less than 21. But what’s relevant here is that it “pushed cards towards a more simplified fee structure,” says Kelvin Chen, senior executive vp and head of policy on the Consumer Bankers Association, a trade association for national and regional banks.
Before the CARD Act, there was a glut of what critics called “fee-harvester” cards, which had very low credit limits and charged exorbitantly high fees.
Here’s one example from 2007: This card ostensibly had a $250 limit, but by the point it piled on a $95 program free, a $29 account setup fee, a $48 annual fee and a $6 monthly fee — all paid upfront — the patron would have just $72 in credit moments after signing up.
The CARD Act cracked down on that form of sneakiness.
Now, Chen says, card issuers depend on just a couple of primary sources of revenue.
The primary is interchange fees, that are paid by a merchant at any time when a customer pays with a bank card. These are percentage-based, often between 1% and three% of the transaction value. (BTW, should you’re curious about learning more, there’s an entire political battle happening over interchange fees — take a look at my 2023 piece on the Credit Card Competition Act.)
The second is from interest paid by individuals who carry a balance from month to month. That is bank card corporations’ primary revenue source, which checks out when you concentrate on how much they charge: As of August, the typical bank card rate of interest nationwide was 21.76%, based on the St. Louis Fed.
The third is fees, a category that features annual fees.
And that is where the trend gets interesting. Over the past few years, the share of Americans who pay an annual fee has decreased, but the full amount of cash paid in annual fees has greater than doubled, increasing from $3 billion in 2015 to $6.4 billion in 2022, based on the CFPB.
From the cardboard issuer’s perspective, charging an annual fee weeds out individuals who cannot or won’t pay for the cardboard, which ends up in a more affluent customer base. That’s an intentional selection that advantages an organization’s bottom line, says Vrinda Gupta, CEO and co-founder at Sequin, a woman-focused debit card startup.
Bank card issuers want richer people to own their cards because they spend greater than the remainder of us, which suggests the businesses earn more income from interchange fees and interest. It’s all connected.
Obviously, not every bank card has an annual fee. (Money has a whole list of its favorite no-annual-fee bank cards, amongst them the American Express Blue Money On a regular basis Card and the Chase Freedom Unlimited.)
In actual fact, Chen points out that annual fees have grow to be much less prevalent currently for what the industry calls subprime and deep subprime cards — that’s, cards for individuals with just-OK or spotty credit. Cards that do have annual fees at the moment are targeted at wealthier borrowers with high credit scores. Most of those cards even have minimum spending requirements — say, $3,000 throughout the first three months — to unlock certain bonuses.
Only one hangup. The typical American has 4 bank cards, which suggests they’ve got a number of decisions. If I’m a bank card issuer, how do I get wealthy people to enroll in — and often reach for — my bank card versus a competitor’s?
Easy: Offer them exclusive perks, like that lounge access I’d’ve been thrilled to have while cooling my heels within the airport. High annual fees also help card corporations defray the expense of offering advantages like a quieter, comfier airport experience. (I’ll dig into this in additional detail in a future issue.)
The underside line
Bank card annual fees are one in every of the key ways card corporations earn a living in a post-CARD Act world. Nevertheless it’s a two-way street: Gupta says issuers of high-fee cards “will strive to provide you back that value” to make the fee value it for you and to motivate you to make use of the cardboard often.
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