BusinessWeek on Capital One’s Credit Trap

The Consumerist pointed us to an article by BusinessWeek exposing the credit card company’s strategy to get consumers to rack up overlimit and late fees. The article is good reading, but the gist of it is this: rather than give out one card with a reasonable limit, Capital One seeks out first-time credit card users, gives them cards with low limits ($300, $500, or so) that are quickly maxed. Then offer the same consumer a new card with a similarly low limit. Chances are good the consumer will go over limit on the first card, and the second, and the third, fourth, fifth, and so on, racking up overlimit fees around $35 per card, per month. Plus, a consumer who is late on one card is usually late on all of them, for another $35 per month.

Let’s see, $35 is 11.6% of $200, making the effective interest rate on your card over 140% yearly if a consumer stays over limit (more likely since the overlimit fee charge counts as part of the credit). And if you are late, too? There’s another $35. You do the math. Overlimit and late fees are clearly more profitable than straight interest. Why settle for a 20% interest income when you can get 300% from a naive, first-time credit card user?