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Credit Card Reform May Be Possible February 27, 2008

Posted by davidzweig in economics.

The Senate will vote tomorrow on the one piece of major legislation that deals with the bankruptcy crisis. It would reset mortgages at lower levels and curtail the evolving orgy of foreclosures in a more cost-effective and humane way. Taxpayers would not be stuck with the bill. The mortgage lending industry opposes it.

At the same time, the Credit Cardholders’ Bill of Rights has been introduced. It would enact seven major reforms. Read about them, and your blood is guaranteed to boil within one minute. If it doesn’t, we’ll reduce your current 14.9% rate to just 35% APR. If it does, we’ll reduce that rate to 37.5% APR.

The credit card industry opposes these changes (and it has no Republican co-sponsors), saying it would place unfair burden of risk on the rest of us. This is curious logic, since it is the issuers, not us, who make the decision to besiege people with marginal credit with torrents of card offers. Who, in the first place, is responsible for the risk the issuers carry? And, unlike the immensely profitable insurance industry, the credit card issuers assess risk retroactively by raising rates.

Anyway, the measure, which contains no fee caps, price controls, or pre-set fees, would eliminate the following abuses:

(1) Universal cross-default: Did you know that if one creditor places you in default, then all creditors can place you in default, and penalty interest rates can be applied by all  of them? This can be done without notice, even if the original default was in error, even if you were current with the other accounts.

(2) Any-time, any-reason rate changes. Credit card companies have long been pursuing students, for example, with come-on teaser rates. Once hooked, the students can face 29.9% APRs, even if their payment record is rock-solid.

(3) Retroactive application of interest rates. When banks decide to goose your interest rate by 10 or 20  points above the base rate, they can apply the new interest rate not only to new balances due, but also to balances accrued under the prior lower rate.

(4) Two-cycle billing.  A beaut. If you pay off February’s balance in full but are late with March’s balance due, your friendly credit card will charge you interest on both months’ balances.

(5) Unlimited overlimit fee applications. If you exceed your credit line three times in a billing cycle, for example, you are charged the penalty three times.

(6) Limits on overlimit. Banks establish a limit on your overall line of credit. When you exceed it, you are charged a fee. If you ask the bank to shut you off (like a person at a bar who knows he or she has had too many) the bank does not have to do that. In this case, N-O means yes.

(7) Pro Rata Allocation of Payments. If, God save your soul, you owe both on your normal purchases and also on a cash advance (at an even higher rate) and make a payment, the bank can apply your payment only to the debt that incurs the lower interest rate. This provision would require pro-rata application.

Abuses like this have grown through the years. Credit abuse is an addiction, just like narcotics and gambling. In this case, the profiteers wear expensive suits, but society permits them to engage in this curious practice of increasing their customers’ dependency. The optimal point of inflection is that at which the debtor is in the worst possible shape, but does not default. (If he does, we have the new bankruptcy law to put him through the next wringer.) In all, this is a moral hazard that is an intended consequence of a system that is seriously out of balance.

If things get much worse, it’s not impossible to imagine the debtor bourgeoisie massing outside the banks with pitchforks and torches. In such a climate, such legislation may stand a chance of serious consideration.



1. Lance - March 1, 2008

Thank you.

My blood is now boiling.

2. World Business Academy Blog - The spot-on dog blog for the recession-minded « A Mind’s Diet - March 8, 2008

[…] then read the article, “ Credit Card Reform May Be Possible” , on credit cards below that if you really want to get […]

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