How the Little Guy Gets Screwed: Chapter Two

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I know I've got nothing but intelligent readers here, but a little incident that occurred to me on Friday got me all up in arms. So indulge me a bit while I get on my soapbox. And let me just say this up front: I'm going to be here a while.

Credit cards.

Fabulous, right? There is just something so American about them. You see, you want, you buy. Oops, don't have the money? No worries...whip out the shiny little card and whoo hoo! Stuff!

An abriged, bullet point history:

Credit has been around in some form between businesses and consumers since the 1800's.
1946: Charg-It was the first bank card introduced in 1946 in Brooklyn. Customers could only use it for local purchases and had to be a member of a specific bank in order to qualify.
1950: Diner's Club introduced. It is the first card used by American mainstream, primarily for entertainment and travel use. A year later, over 20,000 people had an account which had to be paid in full at the end of the month.
1958: American Express, a company that's been around since the mid 1850s, introduced the product with which we identify to rival Diner's Club. Their first plastic card came a year later. Within five years over a million cards were in use.
1966: Bank of America introduced the concept of a national credit card system by franchising the brand, Bankamericard, nationwide. This is now the system we know as Visa.
1966: Not to be outdone, another set of banks joined forces and formed the InterBank Card Association (ICA) to directly compete with Bank of America. Known for a short time as Mastercharge, this is now the Mastercard with which we are all familiar.
1978: Supreme Court Decision Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. This was the decision that, in essence, said banks could export interest rates to other states (read: deregulation. Here's the Wikipedia article, which is not quite so dry.)
1979: The year it all went downhill. This was the year South Dakota began introducing usury law changes into the legislature. In other words, they were attempting to lift the interest rate banks could charge to bring in revenue. Two years later, Citibank came a court'n. Delaware soon followed suit (and gave us MBNA).
1996: Supreme Court decision Smiley vs. Citibank, which lifted the cap on fees credit card companies could charge consumers.

Tedious Banking defintions:

Open-loop System: Banks require cooperation from other banks for funds transfer, e.g. Mastercard and Visa. (In the beginning, banks could only belong to one association or the other. Now, of course, they can belong to both.)

Close-loop System: The issuing card has a relationship with only the consumer and participating merchants, e.g. Diner's Club International, American Express, and Discover.

Interest: The money card issuers charge you for the privledge of carrying said card. This can be anywhere from 8.99% a year to 29.99%. Fees and annual fee not included. And of course, this is calculated daily.

Deadbeat: Those customers who have the nerve to pay off their balances every month, thereby not accruing interest charges. (No, I'm not making this up.)

Revolvers: Those customers who do not pay their balance every month.

Andrew Kahr: He's the guy that enlightened the industry to the notion that if you charge consumers less (by enacting a policy of charging only 2% of the balance instead of 5%) then consumers will actually use the card more. He's also the man behind the curtain of the 0% interest teaser rates. Brilliant? Maybe for them...

Say you: Appreciate the history and vocabulary lesson, but where do the screws come in?

Say me: Oh, I'm just getting warmed up. Let's start with some interesting numbers.

Numbers (all of them verified by different links in this entry):

8: The average number of credit cards families have today

9,659: average credit-card debt in U.S. households in 2007

144 million: people who have credit cards in the United States

55 million: people who pay off their balances every month

35 million: people who only make the minimum payment each month

40.7 Billion: annual profit for the credit card companies in US dollars in 2007

937 billion: amount of outstanding credit in the U.S. as of November 2007.

162: percent that fees increased from 1995 to 2005.

Say you (looking at your watch): I'm waiting for the screws....

Say me: OK! Geez.....

The screws, via bullet points again:

The credit card industry can change the terms of your credit card any time they want. All they have to do is give you 15 days notice.

Over the years, the billing cycle for companies has grown shorter and shorter. Today, it's not unusual for a billing cycle to be 25 days as opposed to 31. And note the time on the due date: some companies have them as early as 10:00. That would be in the morning. They can slap you with a fee for being an hour late. (My one card has a 10:00 "due time.") But don't pay too early! You could get hit with fees then too.

The particularly insidious practice called "universal default". This means that if you miss a payment for one creditor (say your car or your Dillards card), other creditors can automatically raise your rates! You don't even have to miss the payment--you can just be late or the creditors feel you're in too much debt. Doesn't matter if you have an excellent payment record with them. They can change the terms at will, remember? (As of 2007, Citibank no longer uses this practice.)

The industry is practically a mononpoloy. The top six issuers, Bank of America, JPMorgan Chase, Citigroup, American Express, Capital One and Discover now hold 75% of all credit card debt. Think they're not calling the shots with lobbyists? The fewer banks there are the less competition. Free market? Not for the consumer.

With the mortgage crisis, credit card companies are now raising rates--even though interest rates are falling--even if you have a good record with them. Because they can. But where they are really putting the squeeze on consumers are the fees, which are the biggest growth of revenue for credit card companies in the last four to five years (as noted above in the "numbers" section.)*

Make more than the minimum payment, but don't pay off the balance? They'll sometimes let you slide on the next month's payment. Isn't that nice? Of course, what they don't tell you is that they're still charging you interest. OH! Here's another one: Christmas is right around the corner! Some companies will allow you skip the December payment! For a small fee, that is...

Here's something really scary: The feds don't limit the amount of interest banks can charge you. Which is why all your statements come from South Dakota and Delaware (see history, 1978.)

Some credit card companies intentionally pray on low-income consumers. Don't believe me? Check out this article. Or check out this video (time 1:36):

In the meantime, consider:

There is a reform bill being kicked around in the Senate. Call/write/email your senator and let them know how you feel about it. (My guys are hopeless lapdogs for the elephants, but you might have better luck with yours.)

You can watch an excellent Frontline on the industry (free, 60 minutes in length. And bonus! An interview with Elliot Spitzer, presumably with his pant on.) They also have lots of accompanying material online--just click the tabs at the top of the page to which I linked.

There are some good sites out there that can help us wade through the muck. This Frontline page has as several sites listed when you scroll down, plus addresses and websites to use if you need to file a complaint about your own card company.