Have you ever tried to recalculate the finance charges on your credit card bill? I am betting that few Americans know if their bank is overcharging them or not.
I have to confess, for the last 28 years I was one of the people who trusted my bank and didn’t bother to check the interest calculation. After all, in 1966 when I opened my first bank account my mother told me that I could trust my bank and that they would never try to rip me off.
But, this month my wife (she is a lot more attentive to details than me) appeared at the door of my home office (where I was busy watching a football game) and demanded that I recalculate the interest on one of our credit card bills. Of course I didn’t want to do it. However, after a lot of spousal pushing (and during half time) I did what I was told. And, guess what? My wife was onto something. When I looked at the bill I was able to quickly confirm that we had been overcharged. The amount wasn’t much, $4.57, but then again, since we had a $0.00 balance subject to finance charges, $4.57 seemed like a lot.
On Monday, my wife called our bank and they immediately admitted their error and reversed the charge. But, the overcharge on one credit card bill made me wonder; could we be getting overcharged on all our credit cards and how would we know?
So, I got the other credit card bills from my wife (she takes care of all of the finances in our family and pretty much everything else that is important). I discovered that despite paying the entire balance each month on our other cards we still were incurring finance charges. So, I read the rules on the back of the credit card bill. While I am a trained attorney, I haven’t practiced law in a while and am rusty in the arcane art of interpreting legal hieroglyphics. It took me a little while to decipher the credit card agreement and after working on it for about an hour I still wasn’t sure what it meant. My wife was much quicker (after all, she is much smarter than me). Within seconds she told me that the agreement meant that they could charge us whenever they wanted, in any amount and for any reason. Basically, the credit card agreement was a contract that allowed the bank to take our money whenever they felt like it with legal impunity.
My wife warned me not to waste my time trying to recalculate our finance charges because of the language in the contract. But, being a guy and needing to assert my masculine independence, I decided to give it a try anyway. So, I took out my computer and used a spread sheet to calculate the average daily balance that was subject to finance charges. After 30 minutes I couldn’t even come close. I thought that the finance charges should be a lot lower than my bank said they were. But, because of the language in the contract I couldn’t be certain that I was being overcharged which meant it was unlikely that we would win an argument with the bank.
I am pretty sure that unless the average daily balance is $0, or below, there isn’t a way to prove if you are being overcharged and any argument with the bank will be fruitless.
So, let’s go back to the $4.57 overcharge that my wife noticed. I don’t think that it was an isolated incident. After all, computers don’t have brains. They can’t single out people to overcharge. They don’t hate particular customers. And, they don’t know that they are overcharging. Someone had to program the computer. It only follows instructions.
I wonder why the customer service representative was so quick to admit that the computer overcharged us and refund the $4.57. Did she know why we were overcharged? Had management told her to give quick refunds if someone was actually able to figure out that the correct finance charge? Was the overcharge intentional?
Why should I trust my bank to not overcharge me? The finance charge rules are written to be incomprehensible so that without warning or rhyme or reason I may be charged overdraft, service and other fees that are based upon the bank backdating and reclassifying transactions. Large banks haven’t proven themselves to be honest corporate citizens in the last few years.
Most consumer finance contracts seem to be contracts of adhesion, contracts where one side has no negotiating leverage and the other side dictates the terms of the legal and financial relationship. Industries based upon contracts of adhesion are text book examples of situations when there is an appropriate role for government to representing the interests of consumers and make sure that they aren’t being ripped off.
Personally, I would love for our leaders in Washington to take any ten random credit card bills and, without the benefit of their staff, try to figure out what the finance charge should have been and compare their answer to the banks actually charged. I am willing to bet that there isn’t a single Congressman, Senator or White House aide that will even get close. Then, these government leaders should look at the rules and regulations governing the interface between banks and consumers and see if more is needed. I think that more regulation is desperately needed so that consumers can understand what banks are charging them and why and be able to exercise choice.
Consumer credit cards and many other forms of consumer finance are not negotiated in fair and free markets because they aren’t negotiated at all. Consumers have a "take it or leave it" choice and since most consumer don’t understand the terms of their contract the choice of take it or leave it isn’t even a real choice.
Economists and regulators shouldn’t pretend that the invisible hand of market discipline will fix anything. And, since industry concentration has increased over the last few years market discipline has gotten even worse. More help from Washington is needed to restore balance to the system and return consumer finance to something that resembles a fair system.