New Credit Card Fee Could Hurt FICO Score

By Eva Norlyk Smith, Ph.D.

With credit card losses at record levels, credit card companies continue to look for new (and not so new) ways to bolster their sagging bottom lines. Newest on the block is the reintroduction of a reviled fee from years gone by: the inactivity fee. According to Bloomberg, credit cardholders with cards from Fifth Third Bancorp are now charged a $19 inactivity fee, if they don’t use their credit card regularly.

Credit card companies are reviving other fees as well, or coming up with entirely new programs for what they charge in fees and interest. Trying to use a carrot instead of a stick, Citigroup is now encouraging cardholders to swipe more often by offering a ten percent rebate on the month’s interest charges, if the cardholder charges more than a specified minimum amount for the month. Bank of America has been testing the waters for reintroducing annual credit card fees among a small percentage of their cardholders, with fees ranging from $29 to $99.

Many consumers have more credit cards than they need, but refrain from canceling them, because it could hurt their credit score. For people with outstanding credit card debt, cancelling a credit card increases the ratio of debt to available credit. This in turn affects the credit-utilization part of the person’s credit score, which makes up almost one third of the FICO score. In the face of an inactivity fee, consumers with credit card debt would be forced to either pay the inactivity fee or use the card regularly, which increases the risk of adding to their balance.

Inactivity fees have been around before, and it remains to be seen if the fee catches on more widely among credit card issuers. So far, the largest credit card issuers, including JPMorgan Chase & Co., Bank of America, American Express, Capital One, and Discover Financial Services don’t have an inactivity fee. But banks keep an eye on each other’s lending practices, and if deemed successful, new fees are often matched by other card issuers.

While the inactivity fee can be avoided by using the card regularly, however, if you have several credit cards, this could be a cumbersome proposition. U.S. households on average have eight credit cards; should the inactivity fee catch on, having to use all of them regularly could quickly turn into a logistical nightmare. Keeping track of payment due dates and making payments on that many cards would sharply increase the risk of late fees for many cardholders.

Under the new Credit CARD Act, consumers would be able to opt out of the new fee and pay down any remaining credit balance under the old terms. However, opting out would lead to the closing down of the card, again affecting the person’s FICO score. In short, no matter how you look at it, should the inactivity fee become more widespread, it would be adding one more piece of bad credit card news for consumers, in a year that has brought little but.

Published: January 7, 2010