The Research On The Legality Of Credit Card Overdraft Interest And Fees

With the development of social economy and changes in people's consumption concept,the credit card industry in China ushers in a more rapid development period and more and more consumers choose to use credit card.Up to 2013,the total credit card issuance in China has reached 391 million.At the same time of bring convenience for people,the compound interest of credit cards and their high late fees have also been criticized by the public,and even affect the cardholder's personal credit.Also,there are many news reports on credit cards' high interest and late fees.Therefore,rights and interests of credit card holders should not be ignored and such legal issues should be analyzed deeply.This article begins with a decision of the Chengdu Hi-Tech Industrial Development Zone Court in November 2015 which was against the bank's request on the overdraft interest over 24% of the annual percentage rate.And then the Notice of the People's Bank of China on Matters Relating to Credit Card Business was published in April 2016 and comes effect on 1 January 2017 and most banks also have published the announcement on the credit card charges.Such actions change the scope and the calculation of credit card interest,annual fees and late fees after the cardholder overdraws the credit card.Therefore,the author would like to take the credit card overdraft interest and expense as the research object and analyze their legitimacy and rationality.The body of this article is divided into four parts:The first part: the author briefly introduces the legal attribute of credit card overdraft and the main types of interest and fees when credit card is overdrawn.A credit card is a financial instrument that combines payment and revolving credit.From the perspective of law,the credit card is the general term for the card issuer's comprehensive credit agreement for the cardholder and the series of specific loan contracts.Credit card overdraft means that the bank lend the cardholder a short-term loan when the account of cardholder lacks of funds.As one of parties is the bank which establishment is approved by the financial regulatory authorities,the credit card overdraft is a kind of financial loan.Compared with ordinary bank loans,credit card overdraft is a loan with multi-party legal relationship,low admittance access,no guarantee and revolving credit.According to the Measures for the Administration of Bank Card Business and the Notice of the People's Bank of China on Matters Relating to Credit Card Business,the overdraft interest and the main fees charged by the bank are as follows: 1.the cardholder do not need to pay interest and late fees if he pay back all the loan within the interest-free period,2.If the cardholder fails to pay back all the loan but pay the minimum repayment amount in the interest-free period,he needs to pay for interest of 0.05% rate and compound interest,3.If the cardholder fails to pay the minimum repayment amount in the interest-free period,he should pay for the interest as well as the late fees.In other words,the overdraft interest and fees the cardholder bears are divided into three parts: the revolving credit interest,compound interest and late fees.The second part: Analyzing the legal nature of credit card overdraft interest and late fees.Overdraft interest includes revolving credit interest and compound interest.The function of consumer credit allows the cardholder to overdraw within the bank's approved loan amount and continue to use this loan amount.Thus,the interest of overdrawing a credit card is the revolving interest which is a kind of consideration for using other's principal.As for the compound interest,the interest of a combination of principal and previous outstanding interest.The compound interest has the nature of punitive damages for three reasons.First,it is stipulated in the credit card agreement that the cardholder should pay the compound interest if he fails to pay back all the loan,which means compound interest is the product of the cardholder default.Secondly,the compound interest is not the loss estimated previously between the bank and the cardholder because the loss have been made up by the revolving credit interest and the compound interest exaggerates the time value of funds.Thirdly,the attitude of the Supreme People's Court and local courts to the compound interest reflects the punitive characteristic of it.As for the late fees,it should be regarded as punitive damages for three reasons: 1.its aim is not making up losses,2.the purpose of late fee is punishing cardholder's default,3.the replacement of overdue fine does not change is punitive purpose.The third part: analyzing the legitimacy and rationality of overdraft interest and late fees of the credit card.Firstly,it is not reasonable for the cardholder to pay the interest of all overdraft amount and the principal amount of the revolving credit interest should be outstanding loan.The difference between the rule of paying interest of all overdraft amount and outstanding overdraft amount is the principal amount of revolving interest.Regardless of whether the cardholder returns part of the loan,the rule of paying interest of all overdraft amount calculates interest based on the cardholder's full loan.Such practice does not conform to the essence of interest as the consideration of taking up the principal and also violates the relevant regulations in the Measures for the Administration of Bank Card Business.Secondly,there are different regulations on the compound interest in different area in China.The compound interest in private lending is regulated while the Management Regulations on Renmin's rate allows compound interest in credit card overdraft.These double standards on compound interest is questionable because the People's Bank of China will inevitably focus on the interests of the banking industry when formulating relevant regulations,and compound interest should be regulated for it is punitive.At the same time,the object of the compound interest should be limited to the revolving credit interest.Thirdly,the terms of late fees are format clauses and their effectiveness should be analyzed.According to Article 39,Article 40 of the Contract Law and Articles 9 and 10 of the Interpretation of the Supreme People's Court on Several Issues Concerning Application of the Contract Law of the People's Republic of China(2),the terms of late fees should be invalid if the bank does not fulfill the obligation to explain and remind format clauses and not set a maximum limit on the late fees.Fourthly,the real interest rate of credit card overdraft should be regulated.First of all,the same annual percentage rate is applied to different cardholders and cardholders with different ability to repay do not treated suitable annual percentage rate.Moreover,the base of credit card overdraft rate should not only includes the overdraft interest but also the late fees by referring to the experience of United States,the birthplace of credit card and Taiwan.Then,the annual interest rate of 24% should be applied to the credit card overdraft.From the positive perspective,laws are not isolated and the financial institution lending is also in the trend of the marketization of interest rate so the interest rate should not be unlimited.From the negative perspective,if the high credit card's overdraft interest rate is allowed,it will make the discriminations between private lending and financial institution lending which violates the intentions of expanding investment and promoting consumption.The last part: giving suggestion on the legal system of credit card overdraft interest and late fees.First,perfecting the legal system of credit card overdraft system.At present,the civil and economic laws referring credit card are incomplete so it is necessary to regulate the use of credit card from laws,administrative regulations and judicial interpretation,for example,making systematic regulations on credit card overdraft interest and fees.Also,improving the popularity and application of personal credit in order to indirectly reduce the risk of banks,so that banks will not reduce the risk of cardholders' default just from interest and late fees.Secondly,the revolving interest should be calculated mainly on the basic of outstanding loan amount.The rule of paying interest of all overdraft amount and outstanding overdraft amount should be applied in different situations.The former should be applied when the cardholder still owes large sum of loan in order to warn and punish his default and the latter should be applied when the cardholder owes a small sum of loan in order to protect the interests of cardholder in good faith.Thirdly,regulating the real annual percentage rate of credit card overdraft.First of all,the People's Bank of China should definite the scope of the real annual percentage rate which including the overdraft interest and late fees.Then,the bank can apply the floating interest rate and set up the minimum late fees.And setting up the limit of 24% on annual percentage rate for financial institution lending.Fourthly,strengthening and improving the credit card information disclosure system.On the one hand,China can unify the main contents and minimum standards of credit card information disclosure and regulate the disclosure behavior and disclosure format by referring to the rules of the credit card business in the United States.On the other hand,banks should explain and remind the format clauses to the consumers in a way of easily understood and received.