Credit Card Companies? Get Ready For a Change.

Sullivan tells the story of Wesley Wannemacher who paid for his wedding ($3,200) with his new Chase credit card.  How did this end up costing him $12,400 in the end?  The games the credit industry plays.  See, Wannemacher is a perfect client for a credit card bank.  He just made enough money to pay his minimum balance, but not pay off any of the interest.  He was too proud to declare bankruptcy.  The credit card company have a term for him: a live one.  People who pay off their entire balance every month?  The industry calls them deadbeats.  There's no getting green from a deadbeat stone.

Wannemacher, though?  His stone provided a river of green.  The first tactic they used was allowing him to charge $3,200 to the card when his limit was $3,000.  He started off over-balance, and there was a $30/month charge for being overbalance.  Wannemacher paid $100/month for the first few years, but couldn't get the balance down.  In fact, this happened 47 times.  He had $1,500 in over-limit fees, which, again, came about because he was allowed to borrow more than he was allowed to borrow.  That $30 fee was also subject to interest.  Wannemacher couldn't keep up.  He was also fined $1,100 in late-fees.

Six years after the wedding, Wannemacher had $6,300 for a $3,200 initial credit.  He still owed $4,400 more, according to Chase.  He hired a lawyer and struck a deal with Chase where he'd pay $130/month for 47 more months to cancel his debt.  In the end, he was slated to pay $12,400 to borrow $3,2000.

That's just the beginning.  Sullivan explores other tactics the industry uses.  The first thing they do is switch the rules regularly, like interest rates or penalties.  Ideally, these contracts would be written in plane English, but the reality is that they aren't.  The government mandates the rules be written at an 8th grade reading level.  In 2006, the Government Accountability Office (a branch of Congress) performed a study and found that detailed information, like annual percentages rates and fees, were written at a 15th grade level.  The GOA found one bank whose contract was written at a 27th grade reading level.  Yes.  You read that correctly.

Sullivan even calls out a sample contract he has "translated" by a "usability expert."  This is the contract the user signs:

"If at any time during any rolling consecutive twelve billing cycle period we do not receive two Minimum Payments by your payment due date or you exceed your credit limit twice, we may elect to automatically increase any and all of your standard APRs to the Penalty APRs.  Your Penalty APRs on all existing and future unpaid balances will automatically revert to the standard APRs disclosed above if you make six consecutive Minimum Payments when due and you do not exceed your credit limit within the same time period."

The translation:

"If you pay late or go over your credit limit twice in a year, the interest rate you pay on most things goes up to the default rate, currently 30.49%.  It will go back down when you pay on time and do not go over your credit limit for six months."

See how they do that?  The more complicated the writing, the more confused the consumer, ya?  Simple.

The industry has the law behind them, too.  In 1978, the United States Supreme Court ruled that credit card companies were only subject to the lending laws only in their home state... not where the cardholder lives.  So, these companies shop around to find the states that are most favorable to them.  (Ahem.  Delaware.  Ahem.  South Dakota.)  In addition, the Court decided in 1996 that penalty fees were just another form of interest-rate charges, which are not regulated by the state.  So, when you don't pay your card on time, and you're fined $34?  That's a totally random number, and there's nothing you can do about it.  In fact, that was the average penalty fee in 2005 for the one in three cardholders that got fined.  One in three.  In 1995 the average late fee was under $13.  Even considering inflation, that's still a 160% hike.  It's the fastest-growing profit center for the industry.  According to R. K. Hammer Investment Bankers, the industry collected $17 billion in fees in 2006.

Sullivan dives deep, pulling up more and more gems.  For example, the idea is that the credit card company will give you an interest fee loan for you to pay off once you get invoiced.  That's the idea.  In reality, though, there's "credit card math."  If you owe $5,020 and you pay $5,000, you'd think you'd be paying that interest on the $20, but noooooo.  You've broken their trust, and they will charge you interest on the entire $5,020.  Your fee for not paiyng in full?  $35, considering a 18.99% interest.  You pay a fee of $35 that month for not paying those $20, and then the interest just builds up: they will charge you interest on any new charges you have until your balance is paid off in full.  Any new charges.

In fact, the industry's even been lowering that "30-day loan" time to sneak more fees onto cardholders.  Some have moved that down to 28 days.  Some 25 days.  One is even at 22 days.

The industry's too clever to be tied town to making money of their borrowers.  They make money off the companies who accept their cards, too.  Usually they charge 20 cents per transaction, plus 2-3% of the amount billed.  Think about that... these companies get 2-3% of every credit card transaction in the country.  That's a lot of dough.  As Sullivan points out, that's enough dough to mail 8 billion pre-approved cards in the U.S. a year.  That's 73 per household.  Over 1 per week.

Of course, it's one thing for people to be responsible and not borrow more than they can.  It's another for them to be tricked into an arrangement where they have no way out because rules change at a whim.

And so it goes.  Sullivan's book, again, is highly recommended.  Hit up Gotcha Capitalism (How Hidden Fees Rip You Off Every Day - And What You Can Do About It).

Politicians are finally hip to these practices.  Lead by the Democratic Party, the government is acting; The Senate, House of Representatives, and the Fed are moving forward, which is odd and reassuring at the same time.   And it isn't just talk, which is certainly reassuring.  The Federal Reserve, headed by Bernanke (one of Time's 100 most influential people), is proposing new changes:

• More time to pay off their monthly bills
• Keep banks from retroactively applying interest-rate increases to pre-existing balances
• Stop "double cycle billing," where finance charges are computed based on previous billing cycles

Senator Christopher Dodd (D, NY) just proposed a legislative plan that incorporates those same changes, with some additions like preventing issuers from charging a fee to customers who pay a credit card bill by phone.  And the other branch of attack?  Representative Carolyn Maloney (D, NY) introduced a Credit Cardholders' Bill of Rights that's been getting good traction.

Remember that Wesley Wannemacher who got married?  He heard that Congress was looking into credit card practices in 2006, and he wrote Senator Carl Levin (D, MI) about his case.  He actually testified in an important Senate hearing in early 2007.  Days before the hearing, Chase called Wannemacher and forgave all his outstanding debt.  In fact, a Chase executive even apologized to him in the hearing.  "In this case, we simply blew it," Chase CEO Richard Srednicki said.

Really?  Chase blew it?  Is that why they have all these sliding rates and complicated rules?  Looks like the only way to get these money vampires off your back is to be a witness in a Senate hearing.

It's pathetic.  I say... rehaul it all.  They are going to need all the help they can get because these legislative proposals have found little support from Republicans.  Go figure.