Editore"s Note
Tilting at Windmills

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November 22, 2004
By: Kevin Drum

"UNIVERSAL DEFAULT"....I was chatting with a friend on Friday who suggested that Democrats needed to adopt more populist economic policies, things that really helped (and resonated with) the working and middle classes. My initial response was that I thought that Democrats were already doing that, but just weren't doing it very effectively because Republicans control every branch of government.

Still, point taken, and the New York Times ran a long piece on Sunday that's a good example of the kind of thing Democrats could champion. It turns out that credit card companies aren't just charging higher interest rates than ever, they're also writing multi-page, fine print contracts that allow them to double or triple your interest rate with no warning for practically any reason:

The practice, called universal default, started after a rash of bankruptcy filings in the mid-to-late 1990's and has increasingly become standard in the industry.

....Last month, a consumer advocacy group in San Diego, the Utility Consumers' Action Network, filed suit against Discover Financial Services, the issuer of the Discover card, asserting that it had changed the rules late in the game. The group contends that a recent rewording of Discover's universal-default policy is unfair to consumers, especially those in difficult financial situations.

The change, disclosed to cardholders in April, allowed Discover to raise the interest rate to 19.99 percent, from as low as zero, for a single late payment. But the infraction did not have to follow the revision, because Discover reserved the right to look back 11 months for a late payment that could justify the increase.

If you have a large balance on your card and pay your phone bill late, that can be enough of an excuse to double your interest rate.

The illustration below shows what's happening. A decade ago credit card companies issued cards carefully and charged a minimum interest rate of 12% and a maximum of 22%. Today, "careful" is a thing of the past. Instead of evaluating a potential customer's creditworthiness before issuing them a card, they issue them to anyone with a pulse aggressively wooing their business with introductory rates as low as 0%. Then, when these relatively poorer credit risks show even a slight sign of financial distress a late car, phone, or rent payment, for example the rate can be instantly jacked up to as high as 40% or more. And unless you've carefully read your agreement and understand what "universal default" means which virtually no one does these increased payments are completely unexpected.

Is this the sort of abusive practice that populist Democrats could make hay with? Probably. And who knows? Maybe there's a smart one out there who will. If credit card companies refuse to take responsibility for evaluating their customers' creditworthiness before loaning them money, they should expect to take the responsibility for a larger number of defaults. That's the banking biz, after all.

Kevin Drum 1:28 AM Permalink | Trackbacks

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