Revolver

Here's a summary of what I learned from Secret History of the Credit Card.

Once upon a time, usury laws in states such as New York prevented banks from charging more than 12% on consumer loans. The money cost the banks more than that, so their credit card divisions were actually losing money.

Two states - South Dakota and Delaware - did away with usury laws, eliminating caps on interest rates. CitiBank moved to South Dakota. MBNA moved to Delaware. The Supreme Court's Marquette decision allowed banks to "export" their interest rates to wherever the credit decision is made. In other words, they were only required to obey the usury laws of the state of their choosing, and thus could charge much higher interest rates than ever before.

These higher interest rates made consumer credit available to millions of higher-risk borrowers. These are the people who made the credit card companies the behemoths they are today. The industry nickname for them is "revolvers." Those who pay off their credit cards every month, contributing to their own financial health but not that of the companies, are known as "deadbeats."

Bank consultant Andrew Kahr is “credit”ed for several innovations you may recognize. One is encouraging the credit card companies to reduce the required minimum monthly payment from 5% to 2% of the outstanding balance. When the payment looks lower, consumers feel better about charging more. Another incentive is lowering introductory rates from around 10% to 0%; same principle. Consumers think they’re getting a great deal.

The trick was, and is, that there is no law preventing the banks from changing the terms of the loan at any time, for any reason. They are only required to give consumers 15 days’ notice. As Harvard Law professor Elizabeth Warren notes, credit card companies are the only merchant that can change the price of a product after it is purchased.

And thanks to universal default rates, if you make a late payment on any loan – for instance, your car payment – banks can skyrocket your interest rate on the totally unrelated and unaffected loan you have with them. The transgression need not be as egregious as a missed payment. The banks may simply deem your outstanding balances with other creditors too high -- by whatever standard they choose to apply that day.

Even if you manage to keep your head above water with rising interest rates, the Fee Sharks are circling. Another Supreme Court decision in Smiley v. Citibank lifted all restrictions on the fees credit card companies could charge. That’s when the once $5 and $10 late fees became the $29, $35, $39 fees we see today – conceivably $50 and $60 in the near future. Banks are tweaking factors that make it more favorable for them to collect fees, such as the way they calculate interest, and shifting payment due dates to coincide with holidays. Thanks to these and other tactics, banks have doubled their revenue from credit card fees since the Smiley decision.

Who’s to stop them? No one, except the OCC.

The Office of Comptroller of the Currency gave itself exclusive jurisdiction over regulating banks in America. In doing so it put a stranglehold on the consumer protection offices of state District Attorneys.

In California, Providian Bank profited from years of deceptive practices -- such as holding customer payments for weeks and then charging them late fees – until the OCC finally intervened and Providian had to pay a $300 million settlement. The California D.A.’s office had been pursuing consumer complaints about Providian, and characterizes OCC’s involvement as reluctant, then intimidating. The OCC says it was a “cooperative effort.” Providian is still in business in California today, finding new ways to make money, primarily on high risk borrowers.

The Better Business Bureau reports that credit card companies generate more consumer complaints than any other industry in America. Everyone knows someone who has run the Triple Crown gauntlet of the credit card: miss a payment, and your interest rate soars into the high double digits. Add a Late Fee that puts you over your credit limit, which then triggers an Overlimit Fee. Very soon it can cost the equivalent of 6 months’ payments just to get back to where you were – which is right in the Heart of Darkness, the palm of the bank’s hand.

Credit card companies are the only industry given legal carte blanche to run roughshod over the American consumer. Their predatory lending, deceptive advertising, and Teflon contract terms spell bad economics. Americans are happy consumers. They will buy the big-screen TVs, the iPods, the new cars, and the furniture suite – but they should be rewarded, not punished, for doing so, and the government has a vested financial interest in protecting them.

Connecticut Senator Christopher Dodd has introduced a bill (S.2755) to require credit card companies to disclose how long it will take consumers to pay their balances using minimum monthly payments. The credit card companies’ lobbyists are fighting it.

FACTS:
(from Secret History of the Credit Card - see here for research credits)

• Credit card companies took in $30 billion in profits last year
• Americans charged $1.5 trillion to their credit cards last year
• 55 million Americans pay off their credit cards every month
• The average American family carries $8,000 in credit card debt
• 75% of Americans 18 and older have a FICO score
• Three life events are most likely to cause bankruptcy: losing a job, medical problems, and family breakups.