The secret life of credit cards
Anyone catch "The Secret History of Credit Cards" on Maryland Public Television last night?
It's all about how credit card use took off in the U.S.
If you haven't seen it, you should check it out. Really fascinating stuff about fees, interest rates and why credit card companies moved to certain states. If you missed it, here are some really interesting points from the piece, written by Robin Stein, that you should know:
Even if you make your credit card payments on time, the credit card bank can raise your interest rate automatically if you're late on payments elsewhere -- such as on another credit card or on a phone, car, or house payment -- or simply because the bank feels you have taken on too much debt.
This practice is called the "universal default" clause and increasingly is becoming a standard clause in credit card agreements. According to credit card executives, the logic behind universal default is that the bank is not being unreasonable in raising rates when it has reason to believe that the risk of being repaid by the customer has increased. [Note: Credit card banks can now easily track your everyday financial activities and monitor your credit score.]
Your credit score -- known as a FICO score -- has become a vital statistic for many Americans and can be widely shared. It is used to determine how much you can borrow, how much you pay for life insurance, if you can rent a home, and, as already noted, it can be a factor in determining the interest rate you pay on a credit card.
Most Americans don't know what their credit score is, nor how it's computed and with whom it's shared. Your credit score is usually determined by five factors, with the most important being the amount you currently owe and your payment history on large debts.
There is no limit on the amount a credit card company can charge a cardholder for being even an hour late with a payment.
In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted the existing restrictions on late penalty fees. Back then, fees ran to $5 or $10, and usually did not exceed $15. After the Court's decision, fees soared, reaching upwards of $30. Since then, the amount of revenue the companies generate from fees (including late charges, over-the-limit fees, and charges for returned checks) has doubled. Duncan MacDonald, one of the lawyers who worked on the Smiley case, predicts penalty fees could rise to $50 in another year.
It's important to read the fine print on your credit card agreement.
Not many people do, however. Even credit card executives and consumer advocates admitted to FRONTLINE that the last time they read their own contracts was years ago and the credit card agreement is difficult to understand. Tucked into the fine print that people so often ignore is a clause that allows the company to change your interest rate (APR) at any time, for any reason, as long as they give you 15 days' notice. (So, Read the Fine Print.)Many Americans are inattentive about their credit card accounts.
Approximately 35 million Americans pay only the required minimum -- as low as 2 percent -- of their balance each month. Sticking to that rate, it could take years to clear their debt and they'll end up paying far more than the cost of the items or services they bought.
However, many of these 35 million cardholders could pay more than the minimum, and could possibly even pay off in full their balance some months. But they don't -- even though the interest rate they are paying on their credit card balance is considerably higher than what they pay on other things and compared to what they're getting in interest income from their savings account. Is this "financial illiteracy," or just human beings' "irrational behavior?"
[Update - Nov. 2005: Federal regulators at the Office of the Comptroller of the Currency, spurred on by watchdog groups, are requiring banks that issue credit cards to increase minimum payments in accordance with guidelines laid out in Feb. 2003. Banks are being required to increase minimum monthly payments to cover all fees and interest incurred during the month as well as covering at least 1 percent of the principal on the loan. Some banks have raised minimum payments by as much as 2 or 3%, effectively doubling the common minimum payment of 2%.]
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. 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.)Significant credit card debt can put you at a markedly higher risk of bankruptcy.
Going bankrupt usually isn't the result of spending sprees. It's more commonly triggered by job loss, medical problems, or a divorce. Those hit by any of these misfortunes often turn to credit cards to stay afloat. But if they have trouble finding new sources of income or an illness keeps them off the job, they often cannot pay off their debt quickly, especially if their interest rate is high. "They get their feet tangled up in those high interest rates," says bankruptcy expert Elizabeth Warren, "and they just get sunk."
[Update: On October 17, 2005 a new federal bankruptcy law went into effect making it much more difficult to erase credit card debt by filing for bankruptcy.]You can get help.
Several trustworthy organizations exist that can advise people whose debt has spiraled out of control, or those who feel they've been treated unfairly by their credit card companies.
(photo courtesy of stock.xchng)
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