Credit Card Catastrophe: Congress Can't Help 28 comments
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The House passed the Credit Cardholders Bill of Rights, and it's being presented as a hallelujah moment for America's burdened consumer. It isn't, for two reasons. First, the ink isn't even dry, and already there's a clear way for banks to get around it. Second, it was never card policies that put people in trouble -- it was their own stupidity, and we just can't seem to legislate that away.
The bill restricts certain techniques used by credit card companies to squeeze a few more bucks out of the unsuspecting, such as double-billing cycles, interest-charge-maximizing payment application schedules, and sudden rate changes. All fine, but too bad none of that applies to small business credit cards, which are guaranteed by the holder's personal assets and work exactly as consumer cards.
Gee, what a shock that a loophole made it into the bill. That couldn't have come courtesy of bank lobbyists, could it? Of course it could and did, just as such loopholes always have and always will. Big business owns politicians, and the sooner ordinary citizens get that through their heads the sooner they'll stop being shocked when they can't seem to make ends meet by following society's primrose path. Just as bankers paid politicians to roll back regulations that would have prevented the subprime mortgage crisis and then laughed as those same politicians used taxpayer funds to bail them out, so it goes with credit cards.
Of course there's a loophole from the get-go. Credit card companies face rising delinquencies. Bank of America, for instance, reported that 7.8% of its credit card accounts were delinquent by more than 30 days in February, up from 5.9% one year prior. That's part of why BofA lost $1.8 billion in its credit card business in the first quarter. It and other banks are scrambling to shore up profits ahead of a possible massive default wave like the one that swept the mortgage market. That's why they're sending out enticements for people to spend more, are raising rates on existing balances, cutting the duration of teaser rates, and cranking up late fees.
If you think the Obama administration is acting on your behalf because it cares about you, you're new to politics. What it's really doing is trying to get a populist measure on the books prior to what it sees as high chances that another bailout will be needed down the road. This way, it can say it tried to shape up credit card companies in a way that was good to voters, but ultimately needed to prop them up with taxpayer funds the same way it's doing with other parts of the financial industry.
Meanwhile, the only true medicine for credit card consumers in over their heads is learning personal financial management. There's no reason for carrying a balance on credit cards. It betrays woeful ignorance or stupidity, and neither is excusable. The percentage of credit card debt paying for necessities like medicine and food is very low. Most of it is runaway shopping, which the government thinks is necessary to the economy but that you know is not good for your personal budget.
From my new book:
You've heard the knee-jerk defenses of credit cards: they're convenient, they provide a back-up in case of emergencies, they're safer than cash in cases of theft or loss. All true, but debit cards provide those same benefits without any danger of debt. With credit cards, all of those benefits are overwhelmingly outweighed by the financial damage that credit card debt has caused. Like the toxic assets of bad loans in the credit crisis, though, the cards themselves are not the root problem. The idiots carrying them are. So, let's focus on the idiots, again. Don't you get tired of them?
Here's quick proof that most people are financial imbeciles: only improperly used credit cards are profitable to their issuing banks. The banks keep issuing cards, though, so you know the majority of people use their cards improperly. Improperly means carrying a balance and paying interest and late fees.
Credit card industry revenue breaks down like this: 80 percent from interest payments and late fees, 20 percent in fees paid by merchants who accept the cards. If people smartened up, the 80 percent would go to zero and the 20 percent would probably drop dramatically because overall use of cards would decline as people stopped needing debt. Former card swipers would see that, since they pay their balance off each month anyway, they might as well pay cash and avoid the whole billing hassle. That's why I claim that if everybody used their credit cards properly, the industry would disappear.
If you pay off the balance on a no-fee credit card every month, the joke's on the issuing bank. They're giving you a free loan while hoping with their greedy stone hearts that you slip up some time or, even better, repeatedly...forever. It's so much fun to never slip up, though, and giggle each time they print the minimum payment bigger, or try to hide the balance in fine print, or send a letter encouraging you to use the card in new ways for "the lifestyle you deserve," or offer an incentive interest rate on balance transfers. "Balance?" smart people say. "Oh, no, no, no my little banking demon friend. I never carry a balance, so there's nothing to transfer, and I couldn't care less what interest rate you're offering because it never affects me. So go to hell."
To financially smart people, credit cards pose no danger. To the really smart, they provide an easy way to use the bank to one's advantage for a change.
Be really smart. Stop hoping and praying for Congress to set things right in the land of credit cards, and set them right for yourself.
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This article has 28 comments:
Your basic advice is sound. However, as a credit card "manipulator" for 30+ years, I do want to pass on another way that one can "screw the bankers".
I've almost always paid off balances at the end of every month. Periodically (every couple of years), I'll carry a small balance for a few months and make payments until it is paid off. During the period I have this balance, I don't use that card for anything. This way I keep my credit rating up by demonstrating the ability to manage my account properly and make payments consistently over time.
But the really good part comes when you can get decent rates on savings and CDs. When I had a reasonably large purchase to make, was getting near 5% on my MM account and 0% offers were flooding my mailbox, I took advantage.
I made the purchase using one of my existing low-interest cards, about $4750 if I recall correctly. I obtained one of the 0% cards and transferred the balance from the old card to the new before the first payment was due on the old, paying the old balance in full and incurring no charges.
On the new card, I made the minimum required payment until the last month at 0%. I then paid it off in full.
My net result was that $4750 kept earning interest at near 5% for almost 6 full months and I had no loss, other than my time.
For larger amounts, larger gains. However I seldom have any purchases this large.
I don't see yields on MM, savings, CDs, etc. coming back to a level to make this worthwhile for a bit. So I don't advocate it now. But if we see the high inflation rates I expect in the next few years, this may be a worthwhile strategy again. Applied consistently over time on larger balances, it can be very worthwhile.
It would be even better if the bank I had cash in (MM, CD, savings) was giving me high yields and it was the one that offered me the 0% thing. >:-)) I'd be getting them twice.
HardToLove
Not only can we not legislate stupidity away, we can actually bank on stupidity. That's what the banks have done.
PT Barnum was right.
"notsosmart", above, is in a small group that will always find a way to float on the surface of the waves, no matter what the tide does.
By the way "notsosmart", do you know where I can get my 19" Toshiba crt set repaired?
This is where I digress from your analysis. You lay the blame on the stupid greedy card user. While it is true that the individual user who gets himself in a financial bind is certainly responsible for his actions, he was deviously maneuvered into the corner with highly sophisticated psychological tools that he/she may never prepared themselves for.
As you well stated, Washington is not about to help the little guy. It is too caught up in the machinations of highly paid lobbyists and the notion that consumer spending is good for the economy, even when this "spending " ends up to be usury interest transferred to these card issuers.
I see what is happening and I can't stop it.
What I want to know is, how do we, the ordinary citizenry, take control of our elected officials so that they start to represent our interest instead of big business?
How can we get this populist President to institute real reforms to the banking industry to stop the abuses?
How do we stop the Belt-Way lobbyist from perverting our democracy?
How do we get back to sanity in government?
However, I do think there should be reform legislation. Things like making the due date on a weekend day so you cannot make a payment on time when you wait to the last minute is designed as a gotcha. That is one example, but there are so many gotchas in the credit card agreement that most consumers do not understand what is happening to them.
In my opinion, the only people that should use credit cards are people with enough money in the bank that they really don't need them. That seems to be what you are suggesting by paying off the balance each month. I concur. However, as you also mention, if all people follow that advice, consumer spending in the U.S. will drop like a rock. Our economy seems built on putting people on the revolving wheel of consumer spending with credit cards.
The banks know their product hurts most of their customers. They don't care, because that's how they make their money. No different than the tobacco industry. Through credit cards, banks intentionally lend money to people who can't afford it. They make exorbitant profit on obscene interest rates, while many people's balances climb and climb, until they reach the breaking point and they go bankrupt. The banks don't care, because they charge such high interest that it covers the default rate.
Credit cards as an instrument of financial torture are not in the country's interest. Limit the interest rate so something reasonable, say twice the prime rate. But this will cut off many people from credit, the banks will say. Yes, it will. That's the point. Banks lend to people who can't handle it, let them get in deeper and deeper. Only the high interest rates make that possible. At 10-12%, the banks will have to limit credit to those who can actually afford and handle it. The simple fact is that most people should not have credit cards. They are poison and of no benefit to the average person. At best, they make people feel better temporarily (like heroin) at the cost of long-term destruction.
While we're at it, let's legislate an automatic write-off of 50% of credit card debt for anyone who goes bankrupt. Again, that will make the banks lend more responsibly, i.e., to people who are good credit risks.
You use your card responsibly. You charge $1,000.00 each month and pay it off before the next bill arrives. What does American Express make on this "losing transaction"?
January - you charged $1,000.00, the stores paid a service charge to AMEX of approx 3% to process the sale. That is $30.00 in AMEX pocket.
Same fee every month in the year($30 x 12). Gross profit $360.00. How much money did AMEX risk? $1,000.00. Every month its exposure was reduced to zero before new charges were added. Now, that's $360.00 on $1,000.00 of risk. a 36% return. And, that folks, is just the beginning!
If there is a balance left in your account at the end of the month, there is a 15% annual interest on that. Then, there is late payment fees, and over the limit fees, increased interest charges that can exceed 35%... and so on. I can demonstrate a rate of return of 150% or greater. See why this is so important to card issuers?
It's a great big party out there and no one wants to stop it.
Some time ago I used my AMEX card (after a long dormancy) to rent a car. On the initial invoicing I was was charged the 15% interest. When I called to simply find out why, after 37 of being a loyal Gold card holder ($125 year membership-ouch), was I being charged interest even before I got a chance to pay the initial charge, I was given such a detailed and intrusive ID interrogation that I never even got to speak to a representative.
Needless to say... the AMEX card is now history.
This is in part Congress's fault, for not having acted to overturn the Supreme Court decision Marquette National Bank (1978) which took financial regulation, including usury laws, away from the states when dealing with federally chartered banks, which-- surprise!-- all the credit card companies then rushed to form.
Your assertion that high interest rates are unprofitable for the card companies is quite wrong. I agree with the author's points, and the general sentiment of the posts (yours included) but high rates are quite profitable. That is why they do it.
If I loan you $1k at 20-50% interest, I don't really care if you eventually default. I am getting $200-500 per year in interest and can expect it to take you several years before things become bad enough that you have to file for bankruptcy.
So lets assume I collect interest for 6 years while your personal life steadily erodes. That is somewhere between $1200-3000 dollars in interest on a $1,000 loan. Then, when you actually do file BK, I will still get some percentage of the remaining balance back. So if you file Chap 11 with that $1,000 balance still there maybe I get $500 back. So I have made somewhere between $1,700 and $3,500 on a $1,000 investment in a 6 year time frame for APY return in the range of 23-58%. These are quite "back of the envelope" figures but that is a mighty handsome return. There is that small caveat that you ruined your life in the process though. Oh well.
As antiquary said: "It's pretty basic that the foolishness of some is wealth itself to the wise."
The main point of the author is that this wouldn't be possible if people weren't so stupid. I fullheartedly agree with that sentiment. If I hand you a shovel and you just happen to dig your own grave with it, that's your fault.
MM
On May 03 01:20 PM Sonia wrote:
> Used wisely, credit cards are both convenient and profitable. My
> Discover card pays 1% cashback and Capital One Visa, 1 1/4% carhback.
> I put everything including my grandson's college tuition on these
> cards, pay off the balance each month weeks before the due date by
> on line transfer from our bank, and get a receipt on line. The companies
> make certain money from the merchants, so everybody's happy. The
> banks are self defeating when they charge outrageous interest rates.
> The escalating balances and fees mean borrowers can never hope to
> repay, and end by filing bankruptcy, losing the banks what is owed.
> Fixed low interest rates on cards, with credit limits based on credit
> history, would benefit both banks and borrowers.
Adding the populist "credit-card bashing" sentiments of the government and to the high default rates by consumers adds up to one thing: the credit card companies are toast.
Average households are over $11,000 in debt on their credit cards as the average balance is now only down slightly from over $12,000 earlier this year. These are people like you and or your neighbor, most just trying to survive. Often times a large balance quickly accrues with an unforseen accident or family illness and for which there is there is insufficient insurance coverage. Many of the balances are with average families who are struggling every month, trying to make ends meet. Few are devil-may-care freewheeling singles the author seems to think make up most of the indebted public. Many people are caught in a bind where they have only the option of relying on their card and when they cannot carry the balance any longer they really struggle to pay the usurers their required fees any way they can manage.
In addition the credit card issuers have depended on subterfuge, and ultrafine-print to lure their victims into false sense of safety in their cards.
Many people who have lost their jobs have had to depend on credit lines lasting until they can be employed again, unlikely for some given the current economy. They now face being forced out on the street or use their credit cards. The recent industry-wide increases in credit card interest rates and finance charges have been shocking. Many report fees have been raised to twice what they were just months ago.
Swell of the card companies and their banking buddies to pull this off, especially with prime now at 0% to 0.25%.... not to mention how much the banks are now siphoning off their victims in billions of tax dollars the Treasury has provided to the financial industry to fund bank bailouts and bad bank assett guarantees.
Want to see the banking and credit card business exposed for what it really is....this recent PBS 20 minute documentary says it all:
www.pbs.org/wgbh/pages.../
On May 04 06:06 PM Kristian wrote:
> The author of this article may be the one who needs to wise up.<br/>
>
> Average households are over $11,000 in debt on their credit cards
> as the average balance is now only down slightly from over $12,000
> earlier this year. These are people like you and or your neighbor,
> most just trying to survive. Often times a large balance quickly
> accrues with an unforseen accident or family illness and for which
> there is there is insufficient insurance coverage. Many of the balances
> are with average families who are struggling every month, trying
> to make ends meet. Few are devil-may-care freewheeling singles the
> author seems to think make up most of the indebted public. Many people
> are caught in a bind where they have only the option of relying on
> their card and when they cannot carry the balance any longer they
> really struggle to pay the usurers their required fees any way they
> can manage.
>
> In addition the credit card issuers have depended on subterfuge,
> and ultrafine-print to lure their victims into false sense of safety
> in their cards.
>
> Many people who have lost their jobs have had to depend on credit
> lines lasting until they can be employed again, unlikely for some
> given the current economy. They now face being forced out on the
> street or use their credit cards. The recent industry-wide increases
> in credit card interest rates and finance charges have been shocking.
> Many report fees have been raised to twice what they were just months
> ago.
>
> Swell of the card companies and their banking buddies to pull this
> off, especially with prime now at 0% to 0.25%.... not to mention
> how much the banks are now siphoning off their victims in billions
> of tax dollars the Treasury has provided to the financial industry
> to fund bank bailouts and bad bank assett guarantees.
>
> Want to see the banking and credit card business exposed for what
> it really is....this recent PBS 20 minute documentary says it all:
>
>
> www.pbs.org/wgbh/pages.../
Philip,
The easiest way to poke the banks in the eye is to transfer all of your depository business to a credit union. Now that nearly all CU's participate in their ATM consortium, you don't have to pay foreign ATM fees when you travel.
Credit unions mostly lend the money you deposit locally, and they typically do it with a higher degree of due diligence and social commitment than do banks.
And they usually pay a little higher interest. Nothing to get excited about mind, but something. What's not to like?
On May 03 11:10 AM philipmax wrote:
> God article. I see more blogging on the subject of credit cards than
> on most any other financial subject. this is true because all of
> America is hurting from the pernicious practices of the card companies.
>
> This is where I digress from your analysis. You lay the blame on
> the stupid greedy card user. While it is true that the individual
> user who gets himself in a financial bind is certainly responsible
> for his actions, he was deviously maneuvered into the corner with
> highly sophisticated psychological tools that he/she may never prepared
> themselves for.
>
> As you well stated, Washington is not about to help the little guy.
> It is too caught up in the machinations of highly paid lobbyists
> and the notion that consumer spending is good for the economy, even
> when this "spending " ends up to be usury interest transferred to
> these card issuers.
> I see what is happening and I can't stop it.
>
> What I want to know is, how do we, the ordinary citizenry, take control
> of our elected officials so that they start to represent our interest
> instead of big business?
>
> How can we get this populist President to institute real reforms
> to the banking industry to stop the abuses?
>
> How do we stop the Belt-Way lobbyist from perverting our democracy?
>
>
> How do we get back to sanity in government?
The poster was stating that 20% of credit card revenues received are FROM fees, not that the processing fee is 20%.
On May 04 05:46 PM doubleguns wrote:
> One quick question. my business pays about 3% in fees to accept credit
> cards. How did you get to the 20% fee. I can not figure how we pay
> 20% unless you are including what charges business' pay to use the
> business credit card to make purchases.
OHH no it was not the additional fees nor the interest rates that went from 5% sucker rate to the 25% "your screwed" rate. As soo as those bloodsuckers get their hands on someone they squeeze and squeeze. The republicans lifted all restraints on those bastards and they went about raping the consumers. Then they closed the trap by modifying the BK laws for the small guy. The excuse was "restraining the ability for financial flexibility in the market will limit the full potential and availability of credit to the consumer". Does this sound familiar "no regulation of the derivative market because it limit creation of new financial devices depriving the capital markets of their full potential". Same BS from a bunch of Wall Street Thugs that led to the financial collapse of over 400 TRILLION in these new super duper AAA rated Guaranteed by complex mathematics (that no one understood) never to fail. I know lets blame it on the house buyer that we pressed to buy buy buy.
Now they lament that they are losing credit card money as they drive folks into bankruptcy that they sent 10 credit card offers per day.
STICK IT YOU JUST DO NOT GET IT OR YOU DO NOT GIVE A DAMN
As I stated earlier my fees and I believe all merchants are 3% maximum.
On May 04 08:01 PM Anandakos wrote:
>
> The poster was stating that 20% of credit card revenues received
> are FROM fees, not that the processing fee is 20%.
>
> On May 04 05:46 PM doubleguns wrote:
I am still waiting for clarification.
The author stated that 20% of a credit card companies' revenues come from ALL the fees they receive from ALL merchants. This means when you add up all the merchant fees from all the people, like yourself, who pay a small fee it contributes to about 20% of a card companies revenue.
The other 80% of their revenues are from ALL the late fees and interest from ALL the users. No one was suggesting any individual merchant pays a 20% fee.
Make sense?
MM
On May 04 11:41 PM doubleguns wrote:
> anandokos, I cant even figure out how merchant fees could approach
> 20% since merchants just swipe the cards. I believe that possibly
> the poster ment that the 20% was from merchants USING cards and 80%
> from consumers using cards.
>
> I am still waiting for clarification.
Biden was one of the few Democrats who sided with credit-card companies that were trying to make it harder for people to declare bankruptcy.
In 1996, Biden sold his house for $1.2 million more than similar neighboring homes went for -- to an MBNA executive named John Cochran.
Biden's son, Hunter Biden was VP at Delaware-based credit card company MBNA. Now a partner in Oldaker, Biden & Belair, a lobbying and law firm, he receives a $100,000 annual retainer from MBNA.
In 2005, Bank of America acquired MBNA.
In September 2008, Hunter Biden quit his lobbyist work....no need to lobby when Joe Biden is the VP!
And , I stay away from credit card use as though they are a plague.
i wish that I could teach others to understand the true dangers imposed by these instruments.
But, alas, that was the point of my earlier remarks about the conniving manipulation of the public by the cc issuers.
On May 04 07:58 PM Anandakos wrote:
>
> Philip,
>
> The easiest way to poke the banks in the eye is to transfer all of
> your depository business to a credit union. Now that nearly all
> CU's participate in their ATM consortium, you don't have to pay foreign
> ATM fees when you travel.
>
> Credit unions mostly lend the money you deposit locally, and they
> typically do it with a higher degree of due diligence and social
> commitment than do banks.
>
> And they usually pay a little higher interest. Nothing to get excited
> about mind, but something. What's not to like?
>
> On May 03 11:10 AM philipmax wrote:
You also have to ALWAYS read the fine print on anything they send you. I was getting deluged with balance transfer offers with ridiculously low interest payments (although those seem to have dried up lately, YAY!). Invariably the balance transfer and "use this check for anything you want" offers had a hefty transaction fee to do the deal. I might have seen a few at one point that had a 1% transaction fee (not too bad, but you had to factor that into what they were offering you and figure out the true costs). After a while, nothing under 2%. By the time I stopped looking at those offers completely, nothing under 3%. And it used to be they would cap the balance transfer fee at a reasonable number, say $25. That went up and up and up, $75 was common the last time I checked, and some of the firms did not have any dollar amount cap at all.
In any event, caveat emptor!
I don't agree that everyone who has fallen into this trap is stupid. You can be charitable and say "ignorant" or "naive". Considering what has happened to the markets over the last couple of years, ignorant or naive has lots of company.
"Be careful out there!"
Way back when...people would get their pay-check on a periodic basis , say bi-weekly and let's say $1,000.00 per pay stub. They would generally leave $600.00 in the bank to cover mtge, insurance, car payments and such, and split the remainder $300.00 for food and other daily necessities and $100 for the wage earner to go back and forth to work with gas money, lunch, beer money, cigarettes and such.
credit cards were to be used for vacations, capital purchases and large emergency uses. The system worked for most people.
Then, about 8 years ago, an earthquake hit the family budget. Supermarkets started accepting credit card for food purchases. Suddenly, the decision at the register was: Do I charge it or do I part with the cash.(that $300 mentioned above). Credit card were easy and they accrued mileage or or other points. The smart move would have been to return the $300 to the kitty. but it was very tempting to buy stuff with it. If you watched the price of Coach,Inc the pocketbook manufacturer you would have seen a seven fold increase in its price over the same period. ladies shoes experienced an unbelievable price explosion as buyers were sucking the product off the shelves.
When the monthly bills arrived it was easy to see that it was the supermarket bills that were accumulating in the credit card bills, that "understandable" since the head-of-household was aware of the inflation and that his/her income was not keeping up with it. And ..Look...You don't have to pay it up ...You can pay a minimum amount. each month.
The first time that the credit card monthly payment became onerous, well ...just re-finance the mortgage and use the cash-out to extinguish the balance. So far, so good, America was managing its bills. The second time this happened...well.. maybe... we can re-mortgage one more time...The third time....GAME OVER!
Does this scenario soud familiar to anyone else? Let me hear about it. Thanks.
i'm calling forth a grand jubilee.....freedom is coming
GOD is about ready to unleash fury and wrath upon our captials with lightning,hail,thunder...