This Wall Street Journal ($) article reports on how the consumer credit industry is generating huge profits by charging exorbitant interest rates and penalties on credit cards that the industry provides to the riskiest consumer borrowers:

For consumers who pay off their credit-card balances each month, shop aggressively for interest rates as low as 0%, and take advantage of generous credit-card rewards programs, consumer credit has never been cheaper. But for others . . ., the trend is in the other direction.
Card users, consumer advocates and some industry experts complain that banks are attempting to squeeze more and more revenue from consumers struggling to make ends meet. Instead of cutting these people off as bad credit risks, banks are letting them spend — and then hitting them with larger and larger penalties for running up their credit, going over their credit limits, paying late and getting cash advances from their credit cards. The fees are also piling up for bounced checks and overdrawn accounts.

Many folks are surprised to learn that bad check fees are a lucrative profit center for many banks. Similarly, banks make a nice return on late payment fees to their consumer credit card holders:

. . . credit-card fees, including those from retailers, rose to 33.4% of total credit-card revenue in 2003. That was up from 27.9% in 2000 and just 16.1% in 1996. The average monthly late fee hit $32.01 in May, up from $30.29 a year earlier and $13.30 in May 1996, the company said. In 2003, the credit-card industry reaped $11.7 billion from penalty fees, up 9% from $10.7 billion a year earlier, according to Robert Hammer, an industry consultant.

Banks say that penalties and fees are a necessary component of new models for pricing financial services. Gone are the days when banks collected hefty annual fees on all credit cards and charged fat interest rates to all customers. Now, the banks say, they must rely on risk-based pricing models under which customers with the shakiest finances pay higher rates and more fees.

Oddly, the approach of gouging the riskiest customers is the result of competing for the best ones:

Until the early 1990s, most banks offered one main credit-card product. It typically carried an annual interest rate of about 18% and an annual fee of $25. Cardholders who paid late or strayed over their credit limit were charged modest fees. Profits from good customers covered losses from those who defaulted.
Then card issuers, in an effort to grab market share, began scrapping annual fees and vying to offer the lowest annual interest rates. They junked simple pricing models in favor of complex ones they say were tailored to cardholders’ risk and behavior. Eager to sustain growth in a market approaching saturation, they began offering more cards to consumers with spotty credit.
By the late 1990s, banks were attracting consumers with low introductory rates, then subjecting some of them to a myriad of “risk-related fees,” such as late fees and over-limit fees. A 2001 survey by the Federal Reserve showed that 30% of general-purpose credit-card holders had paid a late fee in the prior year.
In a survey of 140 credit cards this year, the advocacy group Consumer Action said 85% of the banks make it a practice to raise interest rates for customers who pay late — often after a single late payment. Nearly half raise rates if they find out that a customer is in arrears with another creditor.

Meanwhile, the Bush Administration’s response to the foregoing travesty is to support the ill-advised and consumer credit industry backed Bankruptcy “Reform” Act, which attempts to make it more difficult for consumers to discharge their personal liability for such consumer credit.
As with health care finance, income tax simplification, and overall government spending, this is another issue on which the Bush Administration has sadly dropped the ball.