One of the cascade effects we're going to see really soon, if the government does not block it, will be people missing payments on credit cards and finding that their credit card rates shoot through the roof.
For the last many months, credit card companies have been quietly issuing complicated amendments to their terms. They're hard for most people to understand, and it's not like the typical consumer has a lot of choice about the terms, but it's all designed to make even people with good credit ratings suddenly start paying through the nose for fairly minor infractions that are often not correctable even by paying the amount due plus interest and late fees.
I suspect the feeble justification for some of these policies, which are way too hair-trigger in my opinion, is that they offer a financial incentive for you to take your business elsewhere or to close your card down. But people often don't have either of those options, and in the current economic climate it's likely to be even worse.
It's true that we all need to try to get bills paid on time. Even so, in times like these, not everyone will be able to. In those cases, we need to encourage people to do their best. Huge shifts in interest rates may be seen by the credit card companies as “strong motivators,” but that may not be the outcome. They may instead induce immediate bankruptcies, or in cases where bankruptcies have been restricted, they may result in suicides, violence, theft, and other acts of desperation. A balance must be struck to keep people working and paying, and to avoid a societal meltdown.
If rates double or triple (or worse), which is what happens when the default rate kicks in, these cards won't just be just incentivizing or penalizing people in a helpful way, they will have crossed the line into being a direct, first-order, contributing cause to our national crisis.
Note that this problem is especially important as an issue of societal fairness because those with houses may find that they are spared such problems by the bailout, while those who could not afford houses may be affected as well, and will have no such protection. The credit card rate shifts that occur when one moves to default pricing are by far worse than anything the mortgage industry has been promising, and—if not put in check immediately—will happen to our most vulnerable citizens.
Some things Congress can do...
Legislative Action Item #1
Congress should act immediately to place strong restrictions on when a "default rate" can become active, at least until this crisis has been sorted out.
It makes sense to charge a nominal fee for a late payment, and it makes sense to compound interest at the normal rate. But if default rates continue to operate on their present hair-triggers, we are in for big trouble very soon as people lose jobs. At that point, they may find it difficult to make all payments exactly right until they find work. Hitting them with super-high rates doesn't make that any clearer. Most people are well-motivated to have jobs right now already.
Legislative Action Item #2
Congress should act immediately to establish firm national limits on credit card rates generally (any rates, not just default rates), and to establish strong national usury laws. (Right now, the laws vary state to state and some states have terrible protections.)
The following bills are of interest. I have not read the bills and am not specifically endorsing these, though they may be good bills. (They have good names, but I've learned to worry about that.) Nevertheless, something needs to be done and these are presumably where to start.
Protecting Consumers from Unreasonable Credit Rates Act of 2008 (S.3287), a bill to amend the Truth in Lending Act to establish a national usury rate for consumer credit transactions. [This bill sets the maximum annual percentage credit rate at thirty-six percent (36%).]
And now for a few things you can do personally...
Personal Action Item #1
If you agree this is an important issue, click the “thumbs up” button at the top of this post to make sure it gets visibility here at Open Salon. Do this right now before you lose your place on this page doing the next item.
Personal Action Item #2
Contact your representatives and senators to let them know this is important. Do it now while you're thinking about it. It doesn't have to be anything elaborate. Just mention your concern about credit card default rates and what could happen to you if something happens to your job and you miss a payment or two.
This is one in a series of posts on credit cards. See also:
Round Up the Usury Suspects (3 Dec 2008)
An All-Volunteer Army of Credit Card Users (5 Dec 2008)
Name Your Own Credit Card Rate! (15 Dec 2008)
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Comments
I paid them off with many a bad word, in fact overpaying them. I am presently sitting back and waiting to see if the rate lowers. I'm canceling them, but I'm intrigued about what they're gonna do.
I have had experience with quite a number of the big banks and have actually found Capital One to be one of the better ones. They have a lot of little nuisance fees for things, but they don't tend to monkey with rates a lot. I don't like the practice of cards moving their due dates, I agree that's a trap. But overall, I studied Capital One's practices at one time and came to believe they were among the best. They've held up reasonably well under government questioning on C-SPAN, in my opinion, too.
Not to get up on my high-horse, but I really can't imagine why anyone has a credit card. I think it's the financial version of smoking crack -- and both credit card companies and crack dealers have about the same level of morality, no offense to crack dealers intended.
The VISA and Discover cards screwed me so thoroughly that I finally just tore them up. So I can't spend beyomd my means any more, but, as Martha reminds us, "That's a good thing."
BTW, my PayPal balance is currently earning 2.36% That's a helluva lot more than banks are paying, plus there's no minimum to earn that.
You may want to consider xfering some of your savings.
Don't make the mistake of thinking it's as simple as a choice. It's a short road from that thought to "If anyone was left in New Orleans after they said to get out, it's their fault for ignoring the warning" or "The only reason people need government health care is that they forgot to save for it in their health savings account." Would that the world were so simple.
And yet I don't dispute your claim that credit cards aren't desirable. Just go easy on characterizing those who use them as the problem rather than the whole system that veritably requires their use.
I have the cynical belief that they also do it as a tax dodge. That is, if they think you're going bankrupt, it's better for them to claim it's interest that you didn't pay them rather than principal, so that they can write off more of the loan later on as a loss and get that loss subsidized by the government. If you partly paid down the loan at the original rate, not the default rate, before going bankrupt, they'd have to claim more had been paid off, so their loss would be less (on paper). Now maybe that's not intentional. But I doubt it.
Yes, I have already seen this happening. I have had excellent credit for many years, and even I am not immune to the rates jacking up.
Used to be 6-7%. Then 13%. My husband's credit was less stellar than mine when we met. He's seen some rates jack up to 22, even 25%. For what? A payment that's made a day late? Customer service (or a sense of humanity) would dictate some kind of grace period. Credit companies had such policies before. (A statement which begs the question... before when? Before usury was so common, I suppose.)
Agreed, if the government doesn't rein this in, it's the next thing to blow up in our faces.... I'm hearing grumblings among decent, hard-working people who sound more like they're preparing for a tea party in Boston than anything. If companies aren't going to play fair, they shouldn't expect Americans to continue putting up with it. Bankruptcies, shirking debt altogether (since there's no debtor's prison here, after all), other problems.
I think it'll happen, honestly. It's just a question of when. I give it a year.
I think that's precisely where we differ. I don't think that credit card companies "help." I think they offer the illusion of help in the hope of getting people addicted or habituated into using the card, and thus increasing the balances on the card.
There may have been a time when credit cards were useful. Today, I think they are largely a scam, and a corrupt way of putting people into a kind of indentured servitude. In effect you get sold into slavery, and your master is the fine print on the credit card agreement.
The agreement gives them great flexibility to increase rates and tack on extra fees, not all of which can be foreseen. The credit card is not a path; it is a minefield. People proceed through the minefield, get a leg blown off, and then claim that "it's not fair." But that's what minefields do; that is their purpose. Perhaps I'm getting cynical in my old age, but I believe that the PURPOSE of the credit card is to turn you into a credit slave. That's not an unfortunate possible side effect; that's the *purpose.* When someone has a $10K or $20K credit card balance, it's "mission accomplished" and high-fives all around over at Gang Bang Financial, Inc.
These days I don't think that there is a "responsible" way to use credit cards, in the same way that there isn't a "responsible" way to smoke cigarettes or shoot heroin. Just because you're not a slave at the moment doesn't mean you won't be in the future.
The idea is that credit cards can help people through "emergency" situations. I would argue that the more you need to use the credit card, the less likely it is that you will be able to pay off the balance, and that what at first appears to be a life jacket keeping you afloat is actually a lead weight pulling you under.
How about Personal Action Item #3: don't have a credit card.
I look forward to your next post on credit cards and why people have them.
It's available on audiobook, by the way. That's my preferred way of getting these things. I haven't "read" his subsequent book but it may be good as well.
Seriously, though, I know I'm late contributing here, but just today I ran across an article talking about the "financial crisis suicide rate" going up. So, Kent, your prediction seems very likely...
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