Democrats & Liberals Archives

Spare Me the "Shock" About Credit Card Rates

Usurious credit card fees are back in the news with feigned shock and outrage about interest rate increases that consumers are getting hit with.

Credit companies were testifying before the Homeland Security and Governmental Affairs Investigations Subcommittee on their interest rate practices. This has been a big set up and is what was meant to happen.

Back in 2005, Frontline aired "Secret History of the Credit Card. The current usury by credit companies was set up in 1996:

There is no federal limit on the interest rate a credit card company can charge.

If you've ever looked at the return address on your statement, you may notice your credit card issuer is located in a state such as South Dakota or Delaware. That's because these are the states that have either weak or no "usury laws" meaning there is no cap on the interest rate that is charged. (View this map that shows the states where the top ten credit card issuers are located.) The federal government once had national usury laws that set a cap on the amount of interest that could be charged on a loan. But after the Great Depression, it repealed them and some states put no new usury laws in place. That's why Citibank, the issuer of MasterCard, moved to South Dakota, which has no cap on interest rates. (For more on the South Dakota story and how the credit card industry took off in the 1980s, read The Ascendancy of the Credit Card Industry.)

Various financial services started implementing higher fees and interest rate hikes. Somewhere along the line, the "universal default" policies came into play. These policies allow a creditor to move a customer to a maximum interest rate for late payment on any reported bill - even if the payments to that creditor have never been late. As this practice started kicking in, consumer bankruptcies started rising. Along the way we started seeing articles like this one from 2004 in the NY Times - Soaring Interest Compounds Credit Card Pain for Millions. The soaring interest was a direct consequence of universal default practices.

We got confirmation of this lucrative practice for through articles such a the 2005 Consumer Affairs report "More Banks Using Universal Default to Hike Interest Rates." This news came after the passage of the new bankruptcy law (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) went into effect on October 17, 2005. This was a legislative change that the companies spent millions to push through. Any efforts to soften the blow of the legislation on consumers was thwarted. To see a list of who voted for BAPCPA check this list

What we largely heard was the company line that looser consumers were bugging out on their credit obligations and that creditors needed to be "protected."

After eight years of trying, Congress next week is expected to pass legislation aimed at a growing problem: Encouraged by mass mailings from the credit-card industry, more and more consumers are taking on more debt than they can handle and ending up in bankruptcy court.

The law, crafted with industry help and backed by President Bush, takes the firm view that this is the borrower's problem, not the industry's. The bill would swing the legal pendulum on this long-running issue in favor of creditors. (WSJ, 4/06/05, embedded article at this link)


Of course, implementation of limitless rates and fees, and then universal default, had nothing to do with bankruptcies. Lost in the entire discussion was the actual purpose of the bankruptcy laws - namely to keep creditors from doing exactly what they were doing. Creditors were luring consumers into debt and then jumping rates outrageously. Implementation of universal default just widened the field of reasons to soak consumers. The strict limitations on consumers filing for bankruptcy have essentially allowed the companies to act with impunity.

As the economy turns downward and costs leap upwards, the issue of extorting consumers arises again. I don't see any reason to hope that controls on the credit industry are going to change in the favor of consumers.

It gripes me no end that both the Senate and the corporate media act as if this is a new issue that came out of nowhere. It is not new, it is intentional. Both the reporters and most of the Senators wringing their hands were there for the 2005 legislation. Why don't they talk about that? Why don't they talk about the abandonment of the populace to no holds barred creditors with dollar signs in their eyes? Give us all a break and report what is really going on.

Testimony of Elizabeth Warren Leo Gottlieb Professor of Law Harvard Law School Before the Committee on Banking, Housing and Urban Affairs of the United States Senate. Hearing: Examining the Billing, Marketing, and Disclosure Practices of the Credit Card Industry, and Their Impact on Consumers. January 25, 2007.

People Are Getting the Short End of the Stick. Wolf, Uncommon Thought Journal, 3/04/05.

Posted by Rowan Wolf at December 5, 2007 3:46 PM
Comments
Comment #240054

Rowan, excellent article.

You said: “The strict limitations on consumers filing for bankruptcy have essentially allowed the companies to act with impunity.”

BINGO! This was all part of the GOP plan to grow the economy by giving free rein to the corporations. Trickle down economics all over again. The Bankruptcy reforms did, in fact, lock consumers between a rock and a hard place.

Millions of card holders who were very responsible in their payments, nonetheless saw their rates rise from below 10% to over 20%. The industry gave reasons such as new credit cards being issued to that holder, to amount of balances as the justifying reasons for raising rates. Ignoring entirely the excellent payment and credit history of the individual card holder.

The Credit Card industry is the next bubble to burst, hastened by the general credit - liquidity problems caused by the Unregulated sub-prime mortgage industry, now creating financial woes for the regulated lending, hedge fund, bond holder, and banking industries. The end is still not in sight.

The FED is being forced by these events to lower rates which won’t impact the economy for as much as another 12 months, causing it to play a very risky game of fueling inflation a year from now in order to resolve lending and liquidity problems today.

This was one of the agenda items I had hoped would be first order business by Democrats upon recapturing the majority in Congress. But, it took the bubble burst to move them to address the fleecing of consumers. Well, better late under Democrats than never under Republicans.

Posted by: David R. Remer at December 5, 2007 4:04 PM
Comment #240086

At my institution our credit card portfolio has doubled over the past three years. We have promoted a refinance program, offering 3.9% rate for nine months. The rate then resets to 9.99% at the end of that period. We do not charge transfer fees. As a credit union we try and focus on our social element of not-for-profit and look at our loss rates relative to income and make sure they offset. We have no need to do more. We also offer back end, free credit counciling if we see the need. Our focus is loyal customers/members based on financial literacy.

Universal default and 95% of credit card practices are horrible, money making practices. However, credit cards can provide some great benefits if used properly. Namely reward points. Like hotel rooms and food in Vegas, if you make money gambling it is a cheap trip. If you pay your balance off each month credit cards can add value. But as you know, the hope of these companies is you won’t.

IMO I worry about the depression of home prices leading to less equity to borrow against, leading to David’s point of credit cards being another bubble. I won’t sign on to the bubble concept and I have not signed up for the sub-prime scare tactics being used. However, I worry about consumers using their credit cards to leverage their future.

All that said, I am continually encouraged by the credit scores of those 25 and under. They are much stronger than their parents. Their savings are higher. And they are very risk adverse.

Posted by: Edge at December 5, 2007 10:05 PM
Comment #240098

Edge, Credit Unions are indeed a marvel of success and regulation both self and governmental. Of course, Credit Unions are the antithesis of for-profit credit lenders, who seek out the less qualified in their greed for extraordinary higher rates of both interest and profits. Credit Unions seek service to, by, and for the individual membership, balanced by the preservation of financial integrity for the membership group as a whole. For-profit sub-prime lenders seek exploitation of their customer base for the benefit of investors, and whose exploitation is limited only by competitive market share.

I would choose a Credit Union over a for-profit enterprise every time, and have. I also choose non-profit medical providers, whenever possible, for the same reasons. Too often it is the difference between increasing profits by pushing through too many surgeries in a day to insure quality, as opposed to limiting the number surgeries per day for the sake of quality.

If I recall correctly, 80,000+ Americans die in hospitals each year, not from their disease or injury, but, from medical malpractice and exposure to the hospital administration procedures.

In my view, there are two primary areas of expertise in which quality should override profit without question, and they are legal defense and medical care. But, as long as the for-profit paradigms underwrite these enterprise activities, Americans will receive far less quality in law and medicine than should be their right as citizens.

Posted by: David R. Remer at December 6, 2007 5:14 AM
Comment #240124

The underlying cause of the looming credit card crunch,pension disaster,the current wrenching houseing problems and other grave economic problems sure to come up inthe next few years is simple. Wages in America have not kept up with growth in production rates or inflation. The small recent uptick has flatlined again. The reason for this happening is a concerted and effective effort by the current administration and their business overlords to depress wage growth and shift the tax burden onto the backs of wage earners.Yet one more reason to work toward a new Democratic administration. I doubt the stakes have ever been higher.

Posted by: BillS at December 6, 2007 1:03 PM
Comment #240127

“There is no federal limit on the interest rate a credit card company can charge”

There also is no federal law which requires one to get and use a credit card either.

Credit cards are like cars: If you choose to use one, you are liable for what happens with it.

Scaring voters with this is about as dumb as trying to scare them with the sub-prime BS.

Posted by: kctim at December 6, 2007 1:28 PM
Comment #240247

kctim said: “Credit cards are like cars: If you choose to use one, you are liable for what happens with it.”

Hmmm…Clothes for child for school, or refuse credit and let him go without this school year wearing pants and shirts that no longer fit. Tough decision there kctim, especially when so many companies are begging me to borrow from them and at such low introductory rates. Car broke down and will cost $1500 to repair but, between rent, food, utilities and the kids, there is only $400 in the checking account. Let’s see, I can turn down the credit and lose my job for lack of transportation, or use a credit card to repair the car and keep my job. Gee, should I give up the job and go on public assistance, or take out the credit that will squeeze my budget tighter still. BOY, that’s a tough one, kctim.

I got two kids in grade school and no health insurance and the doctor said I have a cervical growth that should be removed and biopsied but it will cost $1100. Should refuse the credit card and gamble on my children losing their Mom in a year to Cancer, or have the polyp removed and biopsied? My what is the prudent thing to do? Hell with the credit, if my kids can’t handle adoption after I’m gone the deserve to be given away.

My ARM mortgage payments just doubled but the wages I was making when I took out the loan, haven’t increased but 5%. Should I default on the mortgage or put my groceries and gas on a credit card. Hmmm…. Tough one.

Multiply these stories by about 47 million people, and you have a fairly accurate picture as to how this credit bubble is expanding.

Posted by: David R. Remer at December 7, 2007 5:19 PM
Comment #240427

Aw, you are breaking my little heart there David.
Funny how you “innocently” left out the smartest way to take care of such things: Save!!!

School clothes? Hmmmm, should I quit spending what little money I have on cigs, beer and McD’s and start saving it for such needs? OR, maybe I should accept that hand me downs, clothes a size or two off or charity really can be helpful if utilized wisely? OR, should I take out credit I know I cannot afford and blame the evil companies for my mistake?
Gee, I have a right to have what everybody else does and nothing is my fault, its always someone elses. And besides, why save when the govt will do it all for me nowadays.

Use every available option I have in order to save the life of myself or someone I love? Max out cards to do so? You better freakin believe it!
Sit back, whine and complain that I was taken advantage of? No f-ing way!
Take responsibility for doing so and working my ass off to repay that debt? You better freakin believe it!

ARM payments are really tough aren’t they.
I want a new home, but I can’t afford one the home like the Jones have unless I take advantage of the low rates offered by an ARM. Do I hope that I will be making more money when the adjustable rate changes and go ahead and get the home I know I can’t afford? OR, do I use my friggin head and be happy with a home I can afford? Yep, thats a real “tough one” there David.

Is it my fault people have been conditioned not to save? Nope, and I don’t pretend to care about it either.
Is it my fault people are stupid enough get loans they know they can’t afford? Nope, and I don’t pretend to care about that either.

But then again, I’m not the one saying these people need and deserve help and then wait for govt to help them, am I?

So, 47 million people are all being screwed by predatory lenders and that is why the credit bubble is bursting? BS!
It is bursting because people have chosen to live beyond their means and quit saving.
Everybody believes it is a “right” to have what everybody else has and everybody believes it is their right to have govt take care of them.

Why should I take responsibilty, its always somebody elses fault! Well, at least thats what govt and the left has been teaching anyways.

Posted by: kctim at December 10, 2007 1:07 AM
Comment #249989

Well the credit card fees with APR’s of 20% or more are fairly outrageous, however these past few years credit cards have made pretty generous offers on 0% APR purchases and 0% balance transfers, so you have to give them credit for that too.

-ralph

Posted by: political forum at April 7, 2008 1:14 PM
Comment #277491

“Payday loans” have been an issue of concern of most people, both consumers and legislators. Some social crusaders want to all but ban payday loans. Payday lending reform bills are often enough bans in all but name. They haven’t thought about the nature of the financial tool they wish to curtail. You can’t have APR on a two week loan, can you? Well, that doesn’t matter to people like the Center for Responsible Lending who still campaigns for payday lending reform in the form of hamstringing the industry.

Posted by: Ryland P at March 12, 2009 2:33 AM
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