Would you sign a contract that says, “Any term can be changed at any time for any reason, including no reason”? Anyone who uses a credit card already has.
Such are the absurd terms of the consumer credit-card industry, which is poised to be the next big crisis (after housing) that banks have aided and abetted in US households.
Americans have now racked up nearly $1 trillion in credit-card debt. As housing equity shrinks and costs rise, agencies such as Moody’s report swelling numbers of accounts with balances three or more payments past due. Reinforced by abusive industry practices, the plastic safety net is becoming a permanent cage.
But here’s the good news: If you’ve ever been steamed by surprise fees on your credit-card statement or had your interest rate cranked up without warning, the Federal Reserve Board wants to help you. The Fed? That oracular secret society whose chairmen say Yoda-like things about interest rates? Well, actually, yes.
Ever since its remarkable “oversight” of junk lending led to the mortgage melt-down, the Fed seems determined not to let credit-card defaults drive the American banking system any closer to Third World standards.
There’s plenty to reform. During the housing bubble, credit-card vendors inflated interest rates – even as the Fed slashed them – and found increasingly sneaky ways to usher their customers into perpetually indebted servitude. Such as:
•Raising rates as high as 32 percent on existing balances, with no notice, even when they’ve always been paid on time.
•Compressing the time between statement mailings and due dates.
•Charging interest on debt already repaid.
•Posting on-time payments after their due date – and then charging late fees.
•Neglecting to disclose how much interest and time it will take to pay off a balance with minimum payments (if ever).
Banks in the card game are raising rates and fees to limit their losses on mortgage loans they made. This is doubly ironic, since their delusional lending and exotic mortgage cocktails gave the housing bubble its irrational effervescence to begin with. So now millions of American households are being dragged under even further.
This year, card companies will break all records for late fees, over-limit charges, and other penalties, pulling in more than $19 billion. Not to mention extra charges for paying by mail or by phone (try $14.99). Credit card is the only industry where customers pay extra to be allowed to pay. Where agreements can be changed without notice. Where nearly half of industry revenues come from penalty fees.
You can’t just dismiss these predatory practices as a tax on stupidity. Borrower beware? A quaint notion, when bankers play misleading and retroactively abusive games with other people’s lives.
Competition? Five card vendors control nearly 80 percent of the market. State regulation? Enforcement has been rendered toothless. Recourse to the courts? This industry, given mandatory binding arbitration, is shielded from any class action. Meanwhile, the average mailbox is stuffed with 24 credit card offers each year. I’m looking at one from First Premier Bank, at an attractive 9.9 percent rate, whose fine print cost in first year fees and interest is $256. For a $250 credit line. Provided I pay on time.
Enter the Fed. Randall Kroszner, a Chicago economist hotly averse to regulation, is pushing to regulate the most misleading and predatory practices. The card vendors will tie this up in court, in an endless argument about jurisdiction. That’s why legislation is needed, to make new rules stick – and why every e-mail or phone call to Congress will be another good reason to fix this.
Rep. Carolyn Maloney (D) of New York recently got the House lined up for a floor vote. Similar bills have floated and died before. The Senate “may” hold hearings in September. Got debt? Before you get your next statement – or right now, if you’re online – contact your senator at www.senate.gov/general/contact_information/senators_cfm.cfm and share your own credit-card horror story. If you want the card companies to play fair, your senator needs to hear from you.
Banks should manage risk by reflecting it in their rates and credit limits up front – not through the back door, with sneaky fees and phantom interest rates. It’s time for card vendors to let consumers work down debt, on terms that make it possible to do so.
Originally published in the Monitor, August 13, 2008