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Penalty fees make up nearly half of industry revenues.
Blue Ridge Summit, PA. - 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 Moodys 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 heres 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.
Theres 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 peoples 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. Thats 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. Its time for card vendors to let consumers work down
debt, on terms that make it possible to do so.
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