How devious credit card companies can smother you with debt

In my column last week, I wrote about the recent push in Washington D.C. lead by Treasury Secretary Henry Paulson to overhaul the rules and regulations that govern the financial securities markets.

I concluded that no new federal approach to policing the markets, assuming one could be agreed upon and put into place, would be as effective for investors as their own due diligence.

But I have an entirely different perspective on the feds going after credit card issuing banks that, for years, have engaged in usurious practices that have strangled the average consumer.

Only half of all American households participate in the stock market.

Of those that do, many hold stock through 401(k) plans or other tax-advantaged accounts, or they have portfolios valued at less than $50,000 that consist of treasury securities.

But many more people use credits cards.

Most households average at least one card per family member and have an $8,000 outstanding debt with interest charges that range from 18 to 30 percent. Current aggregate U.S. credit card debt is $800 billion.

Not surprisingly, California — the leader in everything bad for consumers — is the worst offender when it comes to protecting the little guy.

Along with Tennessee, South Dakota and Delaware, California offers the least consumer protection against outrageous fees on the following credit and routine bank charges: delinquencies, cash advances, over-the-limit transactions, stop payments, ATM usage and mandatory grace periods.

The culprit is a 1978 U.S. Supreme Court decision that allowed these the-sky's-the-limit rate policies to prevail.

In Marquette vs. First Omaha Service Corp., the Supreme Court ruled that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States, including in states with restrictive interest caps.

Even if you make your credit card payments on time, the issuing bank can raise your interest rate automatically if you're late as little as one hour on payments elsewhere — such as on another credit card or on a phone, car or house payment — or simply if the bank feels you have assumed too much debt.

This is standard practice found in your credit card agreement fine print, the result of another Supreme Court decision in 1996, Smiley vs. Citibank, that lifted the existing restrictions on late penalty fees. Back then, fees ran to $5 or $10; now they can run as high as $45.

On a PBS special dedicated to exposing the consequences credit card lending, Harvard Law School Prof. Elizabeth Warren, a contract law expert, said, "I don't know any merchant in America who can change the price after you've bought the item except a credit card company. They are the new loan sharks in America."

Credit agreements are another trap for unsuspecting cardholders.

Even Professor Warren, the well-schooled authority, says she can't decipher hers.

One controversial practice the Federal Reserve Bank wants to eliminate is "two-cycle billing," which adds to interest charges by calculating the average daily balance for the last two billing period rather than one.

Sandra Braunstein, director of the Division of Consumer and Community Affairs, testified April 17th before the House Financial Services Committee and outlined other changes proposed by the Fed.

Among them are:

• Introductory rates used to lure customers would more clearly disclose the eventual higher rates and how soon they would be imposed;

• Advertisements for "fixed" rates would be restricted to rates that are truly not subject to change, either for a clearly disclosed period or for the life of the plan;

• A consumer would be sent notice 45 days before a penalty rate was imposed or the rate or a critical fee was increased for other reasons.

• The periodic statement's "effective annual percentage rate" would be revised to make it simpler for creditors to compute and for consumers to understand.

Help may be on the way. But in the meantime, the best bet is to give your credit cards a long rest.

Joe Guzzardi spent 25 years working as an investment and commercial banker. He views their practices with deep skepticism. Contact him at guzzjoe@yahoo.com

Reader Feedback

Edumacation wrote on May 19, 2008 6:30 PM:

" This is a good article! I agree with Cogito but want to spice up my comment a little. Most of us have learned that most banks prey on the weak and extract every dime they can. At one time I trusted banks, but learned the big lesson. Banks are out for NUMBER ONE! They could care less about any depositors financial problems except how to squeeze more blood out of them. My solution, cancel ALL bank credit cards, close all bank savings accounts and CD deposits. Open up accounts with credit unions instead. I have one credit card that pays me over $150/month! Its with a credit union that pays 6.5% on amounts less than $25,000. No bank does this. Most banks are paying 0.25-.05 % annual interest, but have the gall to charge up to 56% per year for using their credit catds. My Credit Union has two stipulations: One, pay off the amount owed within 28 days ( I pay it off in 17 days to avoid the other little tricks they use to shorten the month). Have at least ten credit card charges per month. NO problem, I use it oince every two days to avoid the other little trick about which days they use to make the computation. I put most purchases on this Credit union credit card and they actually pay me for using the card. Of course they are hoping I forget and make a "late payment" 29 days instead of 28 days, or take out a signature loan which I would never do. Banks hate credit unions for this reason. The profit from the credit union can't go to one million dollar a year salaries or bonuses. Banks can do whatever they want with their profits. "

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Cogito wrote on May 17, 2008 1:59 PM:

" There's a simple solution to this problem. Have the personal discipline to avoid the instant gratification need in your life that makes you take that credit card out of your wallet. If you can't pay for your purchase in a month or two, put it down. If you are being taken advantage of by the credit card company, the person at fault is the person who looks back at you when you look in the mirror. "

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