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Tilting at Windmills

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December 5, 2007
By: Kevin Drum

UNIVERSAL DEFAULT....Via Roy, the Consumerist has some entertaining liveblogging of Tuesday's Senate showdown between Carl Levin and the credit card industry:

9:34: And we're off. Levin has arranged for an interesting hearing. The first consumer we will hear from is Janet Hard. Janet is married to a steamfitter. She has a Discover card that jumped from 18% to 24% because her FICO score dropped. [Note: FICO = credit score. –ed] When Janet complained, the rate dropped to 21%. Discover's President will testify today.

9:37: Levin is most incensed by the retroactive nature of rate increases. Take a consumer whose debt jumps from 15% to 27%. That new rate applies not to new debts, but to all incurred debts.

....9:41: Bonnie Rushing has two Bank of America cards. One is associated with AAA. Both cards had an 8% rate. BoA bumped the AAA rate from 8% to 23% because Bonnie's FICO score fell. It didn't matter that her payment history was perfect. Bonnie isn't sure why her FICO score dropped, but she thinks it may be because she opened a store-branded card at Macy's to receive an immediate 10% discount on a purchase, unaware that it would affect her FICO score.

....9:46: Most people don't realize that their FICO score drops even if they approach — not exceed, approach — their credit limit.

9:47: The Committee asked who determines a FICO score, who determines when a rate jumps because of a FICO score. The answer: computers.

9:47: Issuers don't know why a FICO score drops. They have four "reason codes," generic statements like: "balance grew too fast compared to credit limit," or "balance on bank cards is too low."

9:48: By law, consumers are entitled to know who supplies credit data. Even with this data, few consumers realize that a rate hike was caused by a lower FICO score.

....10:25: Levin is really pissed that these rate increases are retroactive. More troubling, none of the consumers testifying realized that rate increases applied to past debts.

The general subject here is "universal default." This means that if, say, you're late paying your electric bill, Visa can double the interest rate on your credit card even though your late payment had nothing to do with Visa. Anything that lowers your credit score, whether you know about it or not, can potentially change the interest rate on your credit card balance.

But it's even worse than that! Not only can they double your interest rate if they feel like it, but the new interest rate applies retroactively to your existing balance, not just to any new debt. Your minimum payment of $500 can become a minimum payment of $1,000 overnight and there's nothing you can do about it.

This is so patently unfair that most people can't believe it's legal the first time they hear about it. Even the subprime mortgage leeches never tried anything like this. But not only is it legal, it's common (read the fine print on your credit card contract someday). In an industry so rotten and corrupt that even Boss Tweed would blush to be part of it, universal default is by far the rottenest and most corrupt practice around.

At least, I think it is. If the credit card industry has something even worse up its sleeve, I'm not even sure I want to hear about it. But feel free to offer up nominations in comments.

Kevin Drum 1:12 AM Permalink | Trackbacks | Comments (84)

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Comments

How about the ceaseless destruction of the environment for the sake of mass mailing a bazillion credit card offers to any creature with a pulse and a mailing address?

I'm sure they have some internal report somewhere about how many hits they expect to get after carpet bombing the country with their junk mailings. These creeps are shaking down the country.

Posted by: Old Hat on December 5, 2007 at 1:27 AM | PERMALINK

And "universal default" sounds an awful lot like price fixing-collusion-racketeering and maybe if we had an Attorney General someone could look into it.

But what do I know?

Posted by: Old Hat on December 5, 2007 at 1:29 AM | PERMALINK

I will never understand why people who get a paycheck would get a credit card. I can understand emergencies, but I doubt that makes up the majority.

Posted by: House Whisperer on December 5, 2007 at 1:36 AM | PERMALINK

Okay, I realize how ridiculous that sounded--obviously people who don't get paychecks shouldn't get credit cards either.

Posted by: House Whisperer on December 5, 2007 at 1:37 AM | PERMALINK

An example of the sad whoredom of Congress is the otherwise admirable Joe Biden. His support of the credit card corps during the bankruptcy legislation heaings is shameful.

Posted by: David Irwin on December 5, 2007 at 1:52 AM | PERMALINK

The interest rates we are talking about are sufficient to put a lot of people into a hole that they cannot possibly get themselves out of.

An interest of 25% or 33% on even a modest debt could make it impossible for a wage earner to pay off the debt. In the meantime, the bank is making out like a bandit.

And, why do credit cards carry such huge interest rates, anyway?

Usury ceilings would be good public policy.

Posted by: Bruce Wilder on December 5, 2007 at 2:03 AM | PERMALINK

This is exactly the type of issue that the Dems should use to hammer pro-business Republicans.

Can see the ad already....

"Republicans support corporations....Democrats stick up for you"

Posted by: mfw13 on December 5, 2007 at 2:04 AM | PERMALINK

Why is anyone in Congress at all surprised by any of this.

It's the Senators and Representatives who get the preferential card rate treatment, who talked to the lobbyists, and took the money, then made the laws, that allowed the companies to make the profits by extorting the people, who took the bait, and then got hooked, and trapped by debt....

Who swallowed the fly?

We did. This is all just posing as far as I am concerned. Our politicians are in bed with these guys the same way as drug companies, health care, and anyone else who can fill their coffers and isn't politically toxic.

These senators will put on a fine show of outrage any time they are on public view. Let's see what happens to the law.

Posted by: notthere on December 5, 2007 at 2:06 AM | PERMALINK

Nothing worse to offer, but an approach I found very interesting (long ago and far away in South Africa IIRC)...

Require CC's to be available as interest-paying deposit accounts. Then fix the differential between between negative (charged) and positive (paid) rates (4% IIRC). For example, if you had a CC where the issuer charged 18% on negative balances, they were required to pay 14% on positive balances.

The idea was to self-limit rates. No idea if it's still used (anyone out there?), but an interesting approach nonetheless.

Posted by: has407 on December 5, 2007 at 2:08 AM | PERMALINK

Oh boy...a subject near and dear to my heart:

Here's just a few of the ways credit card companies will screw you once they get your "business." --

1- Late payments give them the right to increase your card rate...you might start at a relatively benign rate around 9% but you had better be as vigilant as air control radar after that because

They'll often vary the number of days between due dates. Go back and look at your statements and there's a good chance you'll seen the amount of time between payment due dates running anywhere from 24 to 27 days....not 30 or 31....24-27....and it isn't the same from month to month. You can't count on paying your bill on the same date each month...if you do you are sooner or later going to be late and wham...they gotcha.

They can take forever to deposit your check...even if their payment center is one state away from where you live. Sometimes it can take 7-9 days or more for them to credit your payment, and if that delay happens to take you past their due date...wham...they gotcha.

Lures to add to your indebtedness. I cancelled one card and I am still getting a mailing every couple of weeks filled with a half dozen blank "checks" which I am encouraged to fill out and use right now for balance transfers or any "goodies" I've really been wanting. Don't want.....the higher you go on balances, the lower your credit rating goes and wham....they gotcha.

The suggested minimum monthly payment is what many card holders use each month, little realizing that even if they add no more debt to their card through additional charges, the interest rate on what they have, when coupled with inadequate monthly paydowns will actually result in steady increases in what they owe and wham....they gotcha.

And BOY do thy gotcha.....just a few of the elements above and you can easily find yourself with a mountain of debt AND a monthly interest rate in the range of 30 percent. Yup 30...that's no typo.

Now you might argue that state usury laws don't allow interest rates at that level, and you would be right.....but the credit card companies blew holes in that idea by going to Washington and getting Congress to let them set rates at the national level which supercede those pesky state limits.

All in all, Al Capone would be out of business today if he tried to compete with these folks. They have taken extortion to a whole new level.

Posted by: dweb on December 5, 2007 at 2:10 AM | PERMALINK

The credit card business is one of the few "gotcha" business models left. What I mean is, instead of trying to provide value to the customer and getting paid for that value, they try very hard to screw the customer out of money for no discernable service rendered and hope the customer doesn't notice. The other business like this is health insurance - collect premiums and then when you actually need the service, do their damndest to avoid actually providing, which is especially despicable because you are often at your most vulnerable and weakest when they decide to screw with you.

You have to wonder how sustainable a business model is that is almost entirely predicated on screwing customers as hard as possible and essentially not caring that your customer base hates you.

Posted by: George on December 5, 2007 at 2:44 AM | PERMALINK

I don't like credit card companies, but it has always been obvious to me that they are lending me money. Every month you don't pay off your balance, they are LENDING YOU THAT MONEY AGAIN. Thus, they can charge whatever interest rate they like.

You can complain about fine print (of course, you can't complain about fine print if you also complain about all the wasted trees in printing out the contracts), but it somewhat amazes me that people sign up for these credit cards thinking that they are joining a team with the credit cards. They are loaning you money. You are signing a contract to enter into a relatively complex financial arrangement with another party, and people do it like it is meaningless.

If people would just pay more attention to the fine print, realize that the credit card companies tell you (quite explicitly and frankly they do not attempt to hide it: rate changes are usualy one of th emore prominant parts of the contract) that they can change the rate, etc, and actually stop using the cards that do this, why would you expect them to stop. Why should congress make them stop?

If people don't like these practices, then they should stopo using the product. Do what I do: spend 75$ to pay off your credit in full with a zero interest credit card, then when those rates change to something greater than zero percent, do it again. This isn't rocket science.

If you are thinking that there are no "humane" alternatives (c redit card companies that have exactly therules you think are fair) I don't see what is stopping any little bank or billionaire from starting such a company. The fact is, they would have to charge higher interest rates, and people wouldn'T use the product. The question is why people woudln't use the product. The answer is because they don't read the fine print. But this prinicipalled ignorance of people who use credit cards is just amazing to me.

Now, you can complain that credit card companies market too agressively. If you think that, you probably think that tobacco companies, breweries, potato chip makers and confectioners all market too aggressively, too. You can think that, but I don't understand why people believe that we should be protected from dangerous advertising and prevented from thinking for ourselves. If people just thought a bit more about this stuff, and excercised some judgement, then some of these practices (some of wehich I agree seem unsavory, universal default seeming especially unfair) woud be competed out. If you doubt this, then you are doubting the ability of people to think and make judgements. THat's a reasonable position, but a very sad one.

Posted by: Doug on December 5, 2007 at 2:47 AM | PERMALINK

Anyone who doesn't pay off their full balance every month is asking for trouble. I've also seen the trick where they vary the due date month to month; we have our credit card from our bank, so we can pay the credit balance from the bank account instantly.

Doug
Credit cards are a fact of modern life - you need them for everything from setting up a net connection to buying a plane ticket. You can't really not have one.

Yes, it'd be nice if everybody was crafty and diligent enough to outsmart all the shady operators. However it'd be even nicer if we had a set of general business practices that didn't force everyone to work hard trying to figure out how to avoid being taken in a wild-west market filled with shysters who have a lot more time to think of ways to screw you than you have to try to avoid getting screwed.

Enforced non-predatory business behavior also has the salutory effect of not turning the credit business into an ethical race to the bottom, and thus giving decent-minded businesspeople a chance to compete.

Posted by: jimBOB on December 5, 2007 at 3:22 AM | PERMALINK

Doug, typically when one takes a loan you do so on mutually agreed terms. Neither side gets the right to arbitrarily change the conditions of the loan. For most people, the reality of high compound interest rates is hard, if not impossible, to imagine.

Here, you make an agreement where much of the power lies on one side alone, the consumer's only escape is to close out the balance, if they can.

Here, conditions can change for no reason of any action between you and the card company, or even anything that you are aware of. They get to make exhorbitant charges for any small slip, and act little differently from loan sharks once they have a consumer trapped.

Pretty much the model for the sub-prime sharks.

So it's all very well to opine buyer beware, and we're all adults here, and we should read the small print, but it is obvious that people make poor choices and mistakes. That's no reason to allow corporations to set up systems that are in effect extortion to take advantage of these faults.

If the sub-prime fiasco wasn't set up as an extortion ring, then it was set up for criminals to walk away with huge short-term profits.

Credit cards aren't much different.

In both dases it has been facilitated by -- not consumer, but -- corporate driven legislation, and overseers and regulators asleep at the switch.

Funny, that. Ha, bloody ha.

Posted by: notthere on December 5, 2007 at 3:41 AM | PERMALINK

Something called "Dynamic Payment Allocation" is also evil, and pretty common as far as I know. It kicks in when you owe amounts at different interest rates: your payments will always go to pay off the balance with the lowest interest rate first.

Example: you get a new credit card and take advantage of a typical offer, 1 year 0% APR on balance transfers. So you transfer $1000 of debt to the card. But then you make $500 in purchases during your first month, which will be charged the normal APR. When your bill comes, you make a $500 payment, thinking you'll pay off your purchases and avoid any finance charges. But no, the $500 payment goes instead to the balance with a 0% APR, and the $500 from purchases accrues interest.

And of course, to avoid this, you either have to know about it in advance or read the fine print in your contract and connect the dots.

Posted by: hjk on December 5, 2007 at 3:44 AM | PERMALINK

Whatever happened to usery laws?

Posted by: DevilDog on December 5, 2007 at 3:48 AM | PERMALINK

Boy, I've got a story for you.

I come from several generations of bankers on my mother's side, and my grandparents taught me to never charge anything that I couldn't pay in full within 30 days, in order to avoid the compounded interest rates on the balance.

But despite my 15-year stellar record of paying my Bank of America VISA bill in full and on time, BofA began charging me a $60 annual fee for my formerly free VISA card, simply because (as they told me) I never carried a monthly balance.

When I subsequently decided to carry over a $5 monthly balance just to avoid the $60 annual fee, BofA charged me 18% interest on the entire $600 balance due from the previous month, and not merely upon the $5 balance that I had carried over to avoid the fee. It was quite obvious that I couldn't win for losing.

I paid off the bill in full, and then immediately cancelled all my BofA accounts. I changed everything over to Bank of Hawaii, and they've treated me pretty well.

Posted by: Donald from Hawaii, & currently in Chicago on December 5, 2007 at 4:00 AM | PERMALINK

Credit card companies, like the mortgage industry, like banks in general (but not credit unions AFAIK), are increasingly relying on sharp practices to maintain their bottom line after a long term two decade trend of automation, consolidation, and relatively low interest rates.

Thank you to everyone who has falling for their siren songs. Your profitability as a customer has allowed me to maintain a no annual fee credit card and an interest bearing checking account for the last few years; two things that were not available when I entered the workforce.

Posted by: Kolohe on December 5, 2007 at 4:16 AM | PERMALINK

You have to wonder how sustainable a business model is that is almost entirely predicated on screwing customers as hard as possible and essentially not caring that your customer base hates you.

I don't know if hatred is a factor, but the business model of State Lottery's paying for education has a similar, if reversed dynamic.
If the ostensible goal were to be met, people would finally realize that most Lotto's are far worse than any odds you get in Vegas.

Posted by: Kolohe on December 5, 2007 at 4:20 AM | PERMALINK

And this is why I don't use credit cards. I pay in cash, or I pay by check, or I don't buy whatever it is.

(I do keep a credit card for emergencies, but I haven't had one yet.)

Posted by: rachel on December 5, 2007 at 5:42 AM | PERMALINK

I have never been late in making an insurance payment in 15 years, but those bastards raised my rate because of my credit rating.

Posted by: merlallen on December 5, 2007 at 5:49 AM | PERMALINK

what part of right-wing nut-cases running amuck don't people who vote for them understand?

Posted by: given on December 5, 2007 at 6:15 AM | PERMALINK

"I paid off the bill in full, and then immediately cancelled all my BofA accounts. I changed everything over to Bank of Hawaii, and they've treated me pretty well."

Ha! But canceling a credit card account lowers your FICO score too. BofA's door hit your ass on the way out.

We had fun with MBNA and "late payments". They are one of the few companies that don't provide an immediate receipt for online transfers. Nothing to contradict their monthly statements and the Infallibility of computers.

Posted by: B on December 5, 2007 at 6:59 AM | PERMALINK

If you never APPLY for credit, you couldn't care less what these fuckers do. (Except what they are doing to your friends, neighbors, and countrymen.)

Joe Bieden is in deep with the credit card industry, BTW.

Posted by: slanted tom on December 5, 2007 at 7:05 AM | PERMALINK

Wow, there are some holier then thou people posting on this thread. So smug that they haven't fallen for the scams and hooks for the lending industry. You must make plenty of money and lead secure lives, and I'm so happy for you.

The rest of my post is for the really real world.

1. There are many business's that require a card for any type of online purchase. Checks are fast becoming a thing of the past. CC are practically indespensible.

2. Credit card companies lobbied for stricter penalties for declaring bankruptcy. Now if you can't pay anymore... you still gotta pay. If that takes the roof from your head, or food from you child's mouth, so be it.

3. Many of us were taught that having a credit card is necessary for 'emergencies'. And it is, if you care breaks down, or you have a medical emergency, etc. Such things MUST be taken care of, and credit cards are 'there' for you.

4. Once you accrue an amount that nears your limit on any card, you qualify for punishment rate increases on every card. Thus, coming to 900/1000 on a small card can make a 8,000/15,000 card raise it's rate from 5% to 29.9%. As a matter of fact, thats what every card I had did, all in 1 month.

5. Once your $15,000 goes to punishment rates, your $75 of interest a month goes to $375. You also pay interest on your interest, as it's compounded monthly.

I'm out of time, gotta go to work, or I'd post more. There is so much more.

Posted by: Aaron on December 5, 2007 at 7:34 AM | PERMALINK

You know, all kinds of Democrats think that the signature issue demonstrating that Democrats are "Republican-Lite" was the Iraq war resolution.

But in my mind the issue that defined them as Republican-Lite was their complicity in the recent Bankruptcy bill. When lobbyists come knocking on their doors, Democrats have been no better than Republicans in standing up for the average voter when it comes to precisely the economic issues that most affect them. They are shamelessly eager to throw the consumer under the bus if they can get a few bucks tossed their way by a financial industry lobbyist.

THOSE are the Democrats who just don't deserve the name.

Posted by: frankly0 on December 5, 2007 at 7:38 AM | PERMALINK

As long as the average American spends 105% of what they earn, we're not going to get out of the credit card mess. But here are three steps that have worked for me to keep the cards working for me, instead of against me.

1) Contact all three credit bureaus (Equifax, Experian, and TransUnion) and tell them not to give out your info to credit card companies who are looking to sign up new people. Info is on their websites. Since I did that, I've only gotten offers for cards affiliated with companies I do business with, like United Airlines. Everytime I get one, I call the 800 number for signing up and tell them not to send me any more offers. It usually works. 2) Join a credit union, and get your credit card through them. They are generally much less likely to screw you over than a bank. 3) Balance your statement at the end of every month to make sure nothing fishy is going on (like ID theft or a sudden increase in interest rates).

Posted by: Anonymouse on December 5, 2007 at 8:27 AM | PERMALINK

Here's what's outrageous: some banks (Bank of America is one) will offer a $30,000 credit limit to customers that supposedly have poor credit (and so are charged 25% interest rates). How does that make any sense whatsoever? If you really think that someone is a credit risk, then don't offer them $30,000 in credit.

Posted by: Daryl McCullough on December 5, 2007 at 8:51 AM | PERMALINK

i had the experience of paying off outstanding balances on my credit cards and for that accomplishment, saw them drop my fico score several points.

Posted by: linda on December 5, 2007 at 8:54 AM | PERMALINK

Kolohe,
You're kidding yourself if you think other people's trouble with banks is subsidizing you. Well, unless you own the bank's stock.

Posted by: DR on December 5, 2007 at 9:16 AM | PERMALINK

Doug,
Reading the fine print doesn't help you when it doesn't explain why your FICO score could go down. Most people assume that as long as they are making all of their payments on time, their rate won't change. When it does, its too late.

When I look through the agreements that credit card companies send me in the mail, I have to read it several times to figure out what the terms are. I can't imagine the average Joe having any clue what they are signing up for.

Posted by: DR on December 5, 2007 at 9:20 AM | PERMALINK

lots of dems (biden,schumer, clinton, ??? come to mind) strongly back the credit card industry

makes a dem like me kind of sick


Posted by: david mace on December 5, 2007 at 9:30 AM | PERMALINK

An interest of 25% or 33% on even a modest debt could make it impossible for a wage earner to pay off the debt. In the meantime, the bank is making out like a bandit.

And, why do credit cards carry such huge interest rates, anyway?


When Guido charges rates like that, they call it "loan sharking".

Posted by: G.Kerby on December 5, 2007 at 9:48 AM | PERMALINK

I paid off all my credit cards over a year ago...now the only card I use is my bank issued Visa check card, a combination debit-credit card. I never see a bill, and I can only use it up to the amount I have in my bank account. One problem here...never use the card as a debit card when all you are doing is purchasing something, not getting cash back. If you tell the cashier that it is to be debit and not credit, the bank charges a fee. If you use it as a credit card, no fee. I will never use a credit card again, and all the comments here further cement that notion!

Posted by: Roger on December 5, 2007 at 10:05 AM | PERMALINK

One correction to your post: Visa has nothing to do with the interest rates charged to cardholders; it's just a merchant network. It's the issuers -- BofA, Citi, etc., -- that control the interest rates.

Posted by: Steve on December 5, 2007 at 10:05 AM | PERMALINK

The issue reminds me of a case from first year law school contracts class, Williams v Walker-Thomas Furniture. A person who financed multiple purchases from the same store defaulted on one item. The contracts allowed repossession of every item on which an outstanding balance remained as a consequence of any default. The case illustrates the principle that unconscionable terms in contracts of adhesion are not enforceable.

Posted by: DLev on December 5, 2007 at 10:15 AM | PERMALINK

Welcome to the new America, where organized crime is now the Establishment.

Posted by: Michael Corleone on December 5, 2007 at 10:19 AM | PERMALINK

Money line:

11:09: Onto Bruce Hammonds of Bank of America, who sounds like he has the entrails of the poor caught in his throat.

That was awesome ...

I follow this stuff pretty closely for my job and nothing surprised me in th testimony.

Payday loans and car title loans are bajillion times worse, but credit cards are so widespread and incorporated into the fabric of our society that getting them changed will be difficult.

I suggest five things that could be done to help keep credit available, (most) companies afloat, and help keep folks more informed and, thus, better prepared financially. (Of course, none of them are new to me -- just stuff I've found out there.)

* A federal APR cap — 36% has been bandied about by many groups, including the National Consumer Law Center and the Center for Responsible Lending. It's in place for the military, so I see no reason for it not to be for everyone else.

* Trash the old FICO model — Work with the big three bureaus to develop a system that judges risk correctly and fairly, yet is easy for consumers to understand. (I've explained credit bureaus on my site, if anyone is interested in a real basic look). I'd also require them to send out notices to consumers twice a year, rather than putting the burden on consumers, and make any consumer requests for their own reports 100% free; the bureaus hold so much power over our lives, the least they can do is tell us what info they have on us.

* Make "universal default" illegal — Pretty simple.

* Make quite a few subprime cards illegal — The ones from First Premier Bank that are advertised as having a $500 limit and great for those with bad credit, yet come with so many fees that you only have $70 or so bucks left of actual purchase power, are heinous. Yet somehow they're perfectly legal.

* Make financial education a required part of high school AND college curriculum — So many people have no freakin' clue of just the basics, like the difference between interest and APR, how to budget, their credit score and what it means, etc. We may have the worst financial literacy of any industrial nation.

I'm sure there are a few other things that could be thrown in, but I think that'd do enough to keep everything working for everyone.

And sorry for the thesis ...

Posted by: Mark D on December 5, 2007 at 10:23 AM | PERMALINK

When did our goddamn credit score become the defining characteristic of being an American citizen, or a human being for that matter? 20 or 30 years ago, I don't remember your FICO being so bloody important. Now even a potential employer or landlord wants to see it.

I saw a commercial that advised people to find out your fiance's credit score before you get married. Pretty soon they'll be checking the credit score before they'll treat a car crash victim in the emergency room.

When will Americans rise up and refuse to take this anymore? Our Founding Fathers wouldn't have put up with this crap.

Posted by: Speed on December 5, 2007 at 10:25 AM | PERMALINK

Credit cards are fine, the answer is simple: Pay off your balance every month.

Credit Card debt is the worst kind of debt one can have, don't do it (unless an emergency of course).

Posted by: DP on December 5, 2007 at 10:37 AM | PERMALINK

One more thing:

"I am not a number, I am a FREE MAN!"

End of rant.

Posted by: Speed on December 5, 2007 at 10:38 AM | PERMALINK

"10:18: Millard had never missed a payment. Chase could not explain the increase."

The new corporate defense: "The computers did it! We're not responsible!"

Posted by: THX 1138 on December 5, 2007 at 10:42 AM | PERMALINK

Nice to see the credit card industry hoisted on its own petard. I've been working for a merchant group in DC, we're at UnfairCreditCardFees.com, and one of the issues we'd like to bring into these hearings are what's called Interchange fees -- they're transaction fees introduced back in the old days of carbon paper and imprinters. Back then they made sense. But now they keep rising without regard to the actual cost, partly because it's a tremendous source of profit for the banks. We're not asking for an end to the Interchange fee, because there are still costs associated with transactions. But the fees should be cost-based, and merchants should have the option of offering a cash discount.

Posted by: Interrobanger on December 5, 2007 at 10:43 AM | PERMALINK

When will Americans rise up and refuse to take this anymore?

the second Thursday of Never

Posted by: cleek on December 5, 2007 at 10:44 AM | PERMALINK

There are many ways to avoid credit cards. I've happily used my debit card for years, and now I'm moving money to Paypal. Hell will freeze over before I even have a credit card again -- not that I don't get several offers a week (which are good for kindling).

Posted by: Lucy Beloungy on December 5, 2007 at 10:48 AM | PERMALINK

Fascinating how upset Congress is about all of this, considering that they passed the legislation permitting it in the first place.

Posted by: Bill H on December 5, 2007 at 11:09 AM | PERMALINK

I've canceled all my bank cards but one, after the companies involved changed the terms of my agreements. The change I'm talking about is the assertion that the companies could raise my interest rate to astronomical levels if they wanted to, not that they had actually raised it. (I rarely carry a balance, and never over more than two payment periods. My credit history is damn near perfect.) In each case I was warned that canceling my card would impact my credit rating negatively. In each case I replied that I could not do business with a company whose terms were unethical and unreasonable. In two of three cases, I had to call back twice before the account was actually canceled! In the third case, although the account had appeared to be canceled, I just received a replacement card! Somebody's gonna get an earful today.

The only reason these people get away with this crap is because consumers are intimidated enough to let them. If everybody called up and said, No thanks, your change in the terms of my account are unacceptable, I think we'd see an improvement.

Posted by: cmac on December 5, 2007 at 11:19 AM | PERMALINK

As an aside, FICO stands for Fair Isaac Company, which invented the algorithm and software that computes the score. They also own (having bought the company that invented it) the software that runs each time you swipe your Visa card (and about half of the world's credit card transactions). It checks the activity of the card against an index of bad stuff that is generated daily by a neural network. I used to work for the individuals who invented that software when they spun off a different neural net company. I wrote patent applications for them.

A tidbit about that software: If you buy a dollar's worth of gas with your Visa and then try to buy some expensive jewelry or a TV, your card will be declined. It seems when crooks steal a credit card, they often check it for validity by running it through a gas station pay-at-the-pump before using it to buy something, and pay-at-the-pump credit card machines often have a one-dollar minimum just for swiping the card.

Posted by: anandine on December 5, 2007 at 11:21 AM | PERMALINK

Recently when pay-day advance check cashing places were restricted from charging military personnel more than 36%, the industry response was to stop serving the military, because, they said, they needed more than that to make it worth doing.

Posted by: anandine on December 5, 2007 at 11:23 AM | PERMALINK

Places where I've required credit cards:

1. Car rentals.
2. Hotel rooms.
3. Online purchases that require the 'security code' on the back of the card. My debit card does not have that code.

It is fine to declare one has no need for a credit card but for most of us in business it is a necessity.

Posted by: Tripp on December 5, 2007 at 11:34 AM | PERMALINK

"Fascinating how upset Congress is about all of this, considering that they passed the legislation permitting it in the first place."

Gee, and here I though congress was to protect the people rather than allowing them to be exploited. This "do nothing" congress won't do anything to fix the situation because both parties feed from the same trough. Expect lots of outrage and zero change!

Posted by: CTF on December 5, 2007 at 11:41 AM | PERMALINK

Why stop at killing these FICO adjustments?

The credit card industry got permission to charge rates over 15 percent back in the late 1970s when the prime interest rate was almost 10 percent.

That permission was supposed to be temporary. Unfortunately, the industry found out how much money they could make, and they've been fighting reductions ever since.

One of the best things that Congress and the White House could do for the American middle class (and everybody else) would be to put thoe restrictions back. Any cnadidate who made that a part of his/her campaign is going to get a LOT of support.

A rate of 28 percent is usury, pure and simple. I don't mind a company making a fair profit for its services, but let's make the credit card industry PROVE that it needs anything higher than 15 percent to make that profit.

Posted by: Lew Wolkoff on December 5, 2007 at 11:42 AM | PERMALINK

DP:

Some debt is unavoidable - as a medical and/or life-and-death issue. A large percentage of bad credit debt and bankruptcy cases are preceded by a catastrophic injury or illness and the ensuing medical bills. These poor and unfortunates are subject to the same usury and extortion. I'm surprised not to see this topic developed yet in the discussion.

Posted by: MMMM on December 5, 2007 at 11:48 AM | PERMALINK

A rate of 28 percent is usury, pure and simple.

Absolutely. I think the maximum rate that can be charged should be set at some multiple of the existing prime rate, and that multiple should have a regulatory ceiling. If the prime rate is 5% and there was a ceiling multiple of 3x, then the max they can charge is 15%.

Posted by: Doc at the Radar Station on December 5, 2007 at 11:54 AM | PERMALINK

An interest of 25% or 33% on even a modest debt could make it impossible for a wage earner to pay off the debt. In the meantime, the bank is making out like a bandit. And, why do credit cards carry such huge interest rates, anyway? Usury ceilings would be good public policy. Posted by: Bruce Wilder

Yes. And there is a complete disconnect between interest rates throughout the rest of the economy and those being charged for credit cards for even the most reliable customers.

Posted by: JeffII on December 5, 2007 at 11:57 AM | PERMALINK

Issuers don't know why a FICO score drops. They have four "reason codes," generic statements like: "balance grew too fast compared to credit limit," or "balance on bank cards is too low."

You get docked for balances that are "too low?" Damn, you just can't win.

Posted by: kc on December 5, 2007 at 12:01 PM | PERMALINK

It is fine to declare one has no need for a credit card but for most of us in business it is a necessity. Posted by: Tripp

The "Why does anyone need a credit card" question is pretty retarded. Do people forage for their food, live in a Ron Paul gold standard batter economy or . . . what?

If they are trying to live on cash only, they must spend a lot of time at the cash machine, are lying about credit card use (as probably 3/4 of debit cards also function as credit cards) or like going to the bank to get nice crisp bills to hold.

Posted by: JeffII on December 5, 2007 at 12:07 PM | PERMALINK

You get docked for balances that are "too low?" Posted by: kc

Actually, you don't get docked at all if you pay your cards off monthly. And if you can't afford to do this, then you shouldn't be using a credit card anyway ("emergencies," whatever those might be, excluded).

This is a large part of why the American economy is in such bad shape and why bankruptcies have risen. Then again, anyone that carries $5,000.00 + on his credit card probably deserves to be in debtor's prison. Americans, be it individuals or the government, can't control their spending.

Posted by: JeffII on December 5, 2007 at 12:14 PM | PERMALINK

"Credit fraud? You ruined his credit rating?That's worse than murder!"

--from the old American Max Headroom series

Posted by: ThresherK on December 5, 2007 at 1:15 PM | PERMALINK

The credit card moguls are pikers compared to the tax prep industry - instead of 36% they charge about 440% interest to let their suckers walk out of the office with a refund check [instead of waiting 3 weeks for it to come in the mail]. And maybe Kevin can have a post about the IRS next year where we can vent -- did you know the banks will garnish your refund for student loans, and have gotten congress to give their garnishment priority over child support?

Posted by: mr insensitive on December 5, 2007 at 1:28 PM | PERMALINK

DP: Credit cards are fine, the answer is simple: Pay off your balance every month.

Of course, credit card companies have now started canceling accounts of the "deadbeats" who pay off their balances in full every month -- Capital One is becoming quite notorious for doing it. So you may have no debt, but you don't have a credit card anymore, either.

JeffI: Then again, anyone that carries $5,000.00 + on his credit card probably deserves to be in debtor's prison.

So, just checking, since my husband got into a car accident two days after our wedding and had to put the car repairs on his credit card, he should also have been put in debtor's prison since that put him over $5,000 on the card?

Ah, the compassionate conservative at work.

Posted by: Mnemosyne on December 5, 2007 at 1:40 PM | PERMALINK

It may be true that Visa and MasterCard are only marketing and clearing organizations, but they are certainly able to refuse to do business with banks that prefer to act like criminal conspirators or loan sharks. It would be no trouble for MasterCard or Visa to set up standards of behavior that their members are required to follow. They don't do it because they don't have enough ethical members.

Posted by: freelunch on December 5, 2007 at 1:40 PM | PERMALINK

I got a laugh out of The credit card industry got permission to charge rates over 15 percent back in the late 1970s when the prime interest rate was almost 10 percent. The prime rate in the late 70s, early 80s was over 20%.

The people who get their pockets picked by the credit card companies, probably paid too much for their mortgage (see this WSJ story about sub-prime mortgages and FICO scores). According to the analysis done for the WSJ, in 2005, more than 55% of all subprime borrowers had credit scores high enough to qualify for more conventional financing.

The fundamental problem is that the credit card companies count on that vast pool of people who should but don't know better than to trust a lender, any lender. You can try to protect them from themselves, but where would a consumer economy be if people were smart enough to see through marketing ads?

You can't teach speed (or Speed) and you can't legislate smart. Waah, waah, I didn't watch my money, waah, waah, Mommy, Mommy, make them give it back. Good grief.

Posted by: TJM on December 5, 2007 at 1:48 PM | PERMALINK

So, just checking, since my husband got into a car accident two days after our wedding and had to put the car repairs on his credit card, he should also have been put in debtor's prison since that put him over $5,000 on the card? Posted by: Mnemosyne

No, you idiot. What we're talking about here (at least those of us who can read well and have been following the issue) is that, according to the last reported figures, Americans are carrying (i.e. not paying off monthly) a credit card balance of $5,000.00 + from month-to-month. Again, this is one of the reasons why bankruptcy are up - spending money you don't have. That's not the same thing as making a $5,000.00 purchase with a card. Not a lot of people carry that kind of cash around, and many businesses don't take personal checks for bills that high.

Hell, I made the down payment on our last car purchase with a credit card so I could get the mileage. People do this kind of thing all the time.

Also, why the hell are you paying $5,000.00 in auto repairs from a collision? You've got a bad auto insurance policy as well as massive credit debt?

Posted by: JeffII on December 5, 2007 at 1:59 PM | PERMALINK

Join a credit union if you can. From my experience their rates and terms are much, much better than the likes of MBNA, B of A and the like.

Posted by: thalarctos on December 5, 2007 at 2:03 PM | PERMALINK

According to the analysis done for the WSJ, in 2005, more than 55% of all subprime borrowers had credit scores high enough to qualify for more conventional financing. Posted by: TJM

I would imagine that a high percentage of this group was getting in late on the "buy and flip" nonsense. Made complete sense as demand and prices kept rising. But like all market timing investment, a lot of people get burned eventually.

Posted by: JeffII on December 5, 2007 at 2:17 PM | PERMALINK

I love how posts like this (on credit cards, mortgages, etc) never fail to bring smug bastards like JeffII out of the woodwork.

JeffII, you criticize people for carrying balances that are too high, but my initial comment was that people's FICO scores take a hit because they are deemed to have balances that are too low.

Posted by: kc on December 5, 2007 at 2:25 PM | PERMALINK

I think that allowing overlimits as default, fee layering and excessive fees (more than 1% of credit line for late payments, more than 10% of amount overlimit for overlimit) are all more abusive than universal default.

Posted by: SamChevre on December 5, 2007 at 2:46 PM | PERMALINK

JeffII, you criticize people for carrying balances that are too high, but my initial comment was that people's FICO scores take a hit because they are deemed to have balances that are too low.
Posted by: kc

I responded as I did because your claim is unsubstantiated (about canceling accounts because of low balances or pay-offs), and because how you handle your credit card(s) is only one part of a FICO score, which rates overall credit worthiness. A credit card is the least important in a bundle of borrowing if you have a mortgage and an auto loan or two.

Posted by: JeffII on December 5, 2007 at 2:51 PM | PERMALINK

I hate credit cards, so here is another Bank of America story. My wife and I set up an account at BofA when we moved here. Over the years I have opened business accounts, an account for my college age daughter, CDs and other accounts, all at the same branch. We have cards on those accounts that allow us to charge purchases, but we routinely use them only as debit cards. I have repeatedly had "goof-up" charges (like accidental overdrafts, etc.)canceled by BofA because I am a long-time customer. The only borrowing we have done is for our home and cars. The cars are long since paid off, and our home will be in a few months. All this on decent but not overwhelming income, and a healthy but not stellar FICO rating. I could get major loans from BofA in an instant, but won't unless there is a VERY good reason to do so.

You don't need credit cards. You do need a relationship with a bank or credit union. You also need to live within your means. All this talk about credit being a fact of life in the US is a buy-in the credit company propaganda. (This isn't an endorsement of Bank of America. I know others may have horror stories. They just have been good to me.)

Posted by: anoregonreader on December 5, 2007 at 2:55 PM | PERMALINK
I responded as I did because your claim is unsubstantiated (about canceling accounts because of low balances or pay-offs) ...

Actually, JeffIL, in your rush to argue and insult, you apparently missed the fact that kc was quoting the card issuers who said a FICO score can drop because of low balances. I think they probably have a better idea of what influences a score than any of us do.

Also, bankruptcies are on the rise not because so many people are wasting money on 62" plasma TVs and an iPod for everyone in the family -- the top three reasons are divorce, loss of job and medical bills.

That's not to say Americans, on average, are good with money. We're not. It is, however, to say that knee-jerk reactions like many of your posts (debtor prison? Really?) don't do a goddamn thing to solve the problem and just perpetuate a number of myths.

Better disclosures, demystifying the credit scoring process, some sort of APR cap and, MOST OF ALL, mandatory financial education can help solve the problems not just now, but in the future as well.

Of course, in a perfect world, no one would ever need credit. We don't, however, live in a perfect world.

Posted by: Mark D on December 5, 2007 at 3:21 PM | PERMALINK

I use my cards as carefully as possible, but just got caught by the shifting due date Dweb mentioned way at the top. For 7 years my MBNA (now BofA) card has been due on the 9th of the month. Two months ago the date scooted back to the 5th. This last month it was due on the 30th, and of course I missed it by a week because I don't even look at that bill until close to the due date. (I hardly use it anyway.)

So this is the new scam: The period closed on the 10th. Then they had to mail the statement which I probably received two or three days later. My mailed payment was then due no later the 30th -- that's barely two weeks! I didn't like MBNA, and I like BofA even less so it's time to cancel this card.

Posted by: filosofickle on December 5, 2007 at 3:28 PM | PERMALINK

(I do keep a credit card for emergencies, but I haven't had one yet.)
Posted by: rachel on December 5, 2007 at 5:42 AM | PERMALINK

Once you start screwing up, and get into debt, and find yourself devoting a large proportion of your monthly income simply to service that debt - you'll find that "emergencies" become far more frequent.

(hot water heater blows up on you? If you weren't paying $1000 a month in credit card bills, you'd be able to just run out and buy a new one. Instead; now your emergency is that you've got to charge a new hot water heater on the credit card.)

Posted by: osama_been_forgotten on December 5, 2007 at 3:31 PM | PERMALINK
Once you start screwing up, and get into debt, and find yourself devoting a large proportion of your monthly income simply to service that debt - you'll find that "emergencies" become far more frequent.

Which is exactly why everyone should have an emergency savings account with anywhere from $500 (minimum) to two-months take home pay (ideally).

It takes a while to build one up if money is tight already, but you can find ways to save a few bucks here and there, it adds up fast. Almost anyone can get at least $500 set aside within a few months, even on the strictest budget.

We focus on keeping one of these up and going and it's saved our asses many, many times.

(Oh ... for the record, I've written more than 30 articles on personal finance issues, several of which have been published in Stars & Stripes, Army Magazine, and hundreds of Web sites. So I do have some experience in this type of thing. Just FYI.)

Posted by: Mark D on December 5, 2007 at 4:10 PM | PERMALINK

I responded as I did because your claim is unsubstantiated (about canceling accounts because of low balances or pay-offs)

But I never said anything about canceling accounts. My initial comment was in response to Kevin's post, which says (summarizing some of the testimony) Issuers don't know why a FICO score drops. They have four "reason codes," generic statements like: "balance grew too fast compared to credit limit," or "balance on bank cards is too low."

Posted by: kc on December 5, 2007 at 5:22 PM | PERMALINK

...And not even noted is that these changes in interest only mean you'll be in debt longer.

So say you were paying $500 a month on something, and your interest doubles; you now have to pay $750-$1000 a months just to tread water and be in the same spot you were before.

This kind of action is almost guaranteed to make people crash and burn into bankruptcy.

Posted by: Crissa on December 5, 2007 at 5:58 PM | PERMALINK

They need to re-evaluate this universal default rule. It's clearly borderline predatory.

And why is it that credit card issuers raise the APR of borrowers who have trouble making payments?

If they don't have the money at the lower APR, they sure won't have it when their payments get bumped higher. Then credit card issuers will need to charge-off the debt.

Same story with subprime. Borrower wasn't able to make the lower payment, so give them a higher payment loan.

Posted by: Credit Help on December 5, 2007 at 6:55 PM | PERMALINK

The primary business of most banks have been in the business over the last decade or so of buying other banks; performing banking services has almost become a collateral duty.
BOA is the worse of these; and I think that one of their 10-Q's from within the last year has stated that they now get a majority* of their income from fees and penalties, vice from the actual interest spread between funds rate and lending rates. (* I'm not sure about this it could have been that they would not have turned a profit without these fees.)

As stated above everybody who can should leave their bank and join a credit union. I can't find any stats on the percentage of people ineligible for a credit union but with 85 million in credit unions there's pretty good coverage. I would love for a presidential candidate propose a plan to have each state charter a credit union for all its residents to obtain universal eligibility.

Credit cards have their uses, and actually make it possible to do stuff like travel easier and on most shorter notice. But re: using credit cards for 'emergencies' - everyone should build up an emergency fund (in a credit union) for emergencies. Use the credit card to perform the transaction, but use the emergency fund to pay it off.

Please people, start living within your means. Everyone basically did this for the first 1 million years or so of human history. [or 6000 if you prefer :)] Why has everyone stopped?

(and for preempt of 'the medical bills are the emergencies that are causing the hole digging and the bankruptcies': I am in favor of any of the Dem's Prez candidates proposals on health care - more precisely haven't done enough homework to know which I prefer, but have a general sense that any one of them is better than status quo)

Posted by: Kenny on December 6, 2007 at 2:28 AM | PERMALINK

Here is a gotcha story for you:

In mid February I bought a washer and dryer from Sears for about 2500. They told me I could put it on a new Sears Card account and have no interest or payments for 6 months. OK, I thought, even though I had the cash to spare, it would seem a good idea not to draw down my account so much, just in case something came up. So I signed up and payed about 1500 of the balance off in a couple of months. I kept an eye on the statements that were coming my way, and they all said $0 due...great, I thought, when it becomes an actual minimum payment or something, I will pay it off in full. Psyche! Come August 1st, my '6 months' terminated even though it was actually 5 1/2 months and I got slapped with 6 months of interest, at about 22%, on the ORIGINAL $2500, not the remaining balance.

Prior to this, I was very careful about paying off my cards each month, and watching out for gotchas, but even so, I still got burnt.

The credit card companies and the banks behind them are usurious bastards....NEVER forget that.

Peace.

Posted by: Dazir on December 6, 2007 at 2:57 AM | PERMALINK

A small postscript to the above story.

I called the CC customer line and after the usual 10 to 15 min wait, got to an unctuous customer rep, who explained how it was all my fault, but in their benevolence would credit me $50 bucks. I passed.

I cannot imagine how those type of people can ever look their children in the face and explain how they screw people over for a living.

Posted by: Dazir on December 6, 2007 at 3:00 AM | PERMALINK

The worst I ever heard of was Providian, which actually *intentionally* had its return-envelopes imprinted with the wrong zip code, which would cause payments being mailed in to go astray, making many of them late; then Providian would charge the customers late fees.

For sheer chutzpah, I think that takes the blintz.

Posted by: Nancy Irving on December 6, 2007 at 8:33 AM | PERMALINK

By the way, the only major presidential candidate talking about this issue is John Edwards.

Posted by: Nancy Irving on December 6, 2007 at 8:53 AM | PERMALINK

"Places where I've required credit cards:
1. Car rentals.
2. Hotel rooms.
3. Online purchases that require the 'security code' on the back of the card. My debit card does not have that code.
It is fine to declare one has no need for a credit card but for most of us in business it is a necessity.
Posted by: Tripp"

You can rent cars with a cash deposit card at Hertz.
I'm sure the same type of card or a cash deposit will work at a hotel.
Online purchases can always be made by US Postal Money Orders and snail mail.

If credit is the answer, what is the question?


Posted by: slanted tom on December 6, 2007 at 10:59 AM | PERMALINK

I left a job in July and stopped using my credit card altogether while job hunting. More debt, not a brilliant idea when you have no income.

After several months, I received a notice that Citibank wanted to offer me a severe drop in my interest rate for any new purchases --- their special offer to me for being so great. So I approved the offer because I needed to renew a professional association membership.

Within a week of renewing my membership, I got a mailer letting me know that my credit limit had been raised about $2000.

While job hunting, I'm making minimum payments so of course they'd love for me to spend more money; at this rate I'd never be out of debt.

Posted by: Zak on December 16, 2007 at 2:58 PM | PERMALINK




 

 

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