Kent Pitman

Kent Pitman
New England, USA
Philosopher, Technologist, Writer
I've been using the net in various roles—technical, social, and political—for the last 30 years. I'm disappointed that most forums don't pay for good writing and I'm ever in search of forums that do. (I've not seen any Tippem money, that's for sure.) And I worry some that our posting here for free could one day put paid writers in Closed Salon out of work. See my personal home page for more about me.


DECEMBER 3, 2008 6:06AM

Round Up the Usury Suspects

Rate: 21 Flag

Although it started with mortgage problems, the present economic crisis is much bigger than that. Jobs are being affected, and that means it's going to be hard to pay bills. And then what?

Well, if credit card bills don't get paid, I'm thinking we'll see a lot of credit card rates shooting up. A missed payment can trigger a shift to the “default rate,” which will in many cases push the credit rate so high it's hard to recover from.

And as if that weren't enough, there's the cascade effect of “universal default,” where if this happens on one credit card, you're likely to find other credit cards decide to raise your rates, too.

The credit card companies, after all, are those same banks that are already in trouble for other reasons and they'll want to squeeze the most money out of you that they can before someone else does by exercising their power to change your rates as high as they can.

Of course, charging excess interest used to be illegal.

1 : the lending of money at exorbitant interest rates; specifically : the crime of charging or contracting to charge an unlawfully high rate of interest
2 : a rate or amount of interest charged in usury

Source: Merriam-Webster's Dictionary of Law

But in the modern law, protections vary enormously state by state, being huge or unbounded in some cases. This really complicates any kind of national dialog on the matter.

The laws also have weird exceptions. For example, in the United States, in 1978, “national” banks were made exempt from usury laws.

Arguments are made that there are good reasons for allowing really high interest rates—but I don't happen to believe any of them so I won't waste time repeating them here.

Attempts have been made to place national limits on interest rates. Recent bills of interest are:

These proposed laws would begin to address not only the problems with regular credit cards I've mentioned but also the so-called payday loan schemes, which many times more harsh than any credit card.

Reinvigorating the laws against usury is a good first step. It won't totally fix the problem, but it could avoid some potentially bad cases of abuse that are sure to arise as situations become more desperate. But something has to be done now before we see a suddenly worse problem as the economy worsens and people start to miss payments.

After all, when there is a problem, what are the chances that the government is going to dive in and try to renegotiate individual credit cards? I'm guessing low to non-existent. Credit cards are not as glamorous as houses. They sound more frivolous and irresponsible. They aren't about an asset. (Never mind that many of the home loans being rescued probably involve people who have zero equity in their home. At least they were smart enough to look like they have an asset.) So those of us with credit cards are going to be on our own to fend against the credit card companies eager to squeeze that last dollar out of us.

If you got value from this post, please "rate" it.

This is one in a series of posts on credit cards.
See also:

Hair-Trigger Credit Card “Default Rates” (6 Oct 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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"Reinvigorating the laws against usury is a good first step."
completely agree, great post
Kent, you have raised so many points here. I am going away for a while and will return and read this again.
Good post, excellent points
And while we're at it, let's take a Democratic reevaluation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made it more difficult for individuals who got into trouble with credit card debt to qualify for relief under Chapter 7 of the Bankruptcy Code.
Kent, excellent post as always; you look at an issue from all sides and positions. Have you ever though about starting a Think Tank for the Common Man. (common meaning everyday, not you). Because, we should could use your intellect and sound thinking.
Kent, thanks for all of the information on the recent House and Senate bills. I'll write to my Senators and Representative in the hope that the absurdity of the high interest rates on credit cards and payday loans can have reasonable caps, not interest rates in the stratosphere.
Rich, I know of the Act but not a lot of detail about it. I suspect there's a lurking irony if I dug around more that the people who got it put into law are probably the ones running the big corporations that fell through. Which isn't to say that the “little guy” or “person on the street” didn't have a hand in making the current mess, but the point is that those people are at actual peril for what they did while many of the “corporate types” to insisted on the creation of that legal peril for others are not themselves at any legal peril for the mess they've made. This is very troubling to me.
gm, I was just assuming those exist and that they'd be contacting me. But I suppose like all other things political if you want something done right, you gotta do it yourself. Actually, I'd really love doing work like that. One day...
Ohio just passed a payday lending reform bill on the basis of the exorbitant interest rates. I don't know why the same couldn't be applied to credit card interest rates.

I feel for people who are carrying big balances, especially when they used them for groceries and necessary clothing items. I hope they can consolidate their debt in a manageable way.
Done Kent. I have contacted Senator Alexander.
Valuable post and my thanks to you for shedding light and such ease of contacts.

Best Regards,
Excellent post. A maximum APR of 36% sounds enormous to me- and that is keeping it low??? Ouch.
These companies, along with Insurance companies, lie at the very root of this country's economic problems. Turns out, they also represent Joe Biden's - and therefore Barack Obama's - Achilles Heel.

Sad, sad, sad.
Thirty Six Percent!!! Oh my, break out the hats and hooters!! Or as Letterman would say: 'Cut me a slice of that'. Is this a joke?? If this is reform...
How about not boosting the interest rates on people that are already in trouble? What a concept! What are the credit card companies trying to do besides create hundreds of thousands more homeless people?? These two bills are not even a start at real reform. They are as absurd as any other neocon proposal and I hope that the author(s) of these bills are voted out of office. This is NOT what the "new new deal is about".
Krissi, I have the vaguest recollection of a news story from a couple of years ago where they tried to get it capped at 75% and that failed. So 36%, while ridiculo-huge, is still an improvement. See, for example, the Wikipedia page on payday loans (also mentioned in the article).
credit cards suppliers have supplanted the role of your neighborhood loan shark, and must be allowed to get rich in similar fashion. it's only fair.

but you know what? it's possible to live without them. i recommend it, allow though it does initially require some self control to walk past the candy shop. if you do control your spending, instead of paying interest- you get some!

but americans can't do that, for some reason. maybe discussion would be better focused on what that reason is?
Al, I think you're oversimplifying as to cause by assuming all people's circumstances is like yours or like ones you're imagining. Your suggestion works well for people who are just trying to decide how to shop for Christmas but doesn't work well for someone who has lost his job and has a home payment or a medical expense to make with no money in the bank. I'm going to claim (in more detail in an upcoming blog post) that there is little other option for many people than to put things like this onto credit cards. I think that until the problem of what to do in this case is solved, it's insensitive for well-meaning people with jobs and/or money in the bank and/or medical insurance to claim that use of credit can be avoided by just paying cash. Certainly the issue of casual overspending can be addressed that way, but credit cards are also the common man's economic safety net. If one doesn't have cash and no one is offering help at a critical time, there is little other option than credit cards. But if we could please agree not to debate this here on this thread, I promise to follow soon with another thread that makes that relevant. (This particular usury issue was broken off of the other thing I'm writing just to make it not too big, and if you have the entire discussion on this one little issue's thread, that will defeat my purpose in breaking it up into manageable chunks.)
Thanks Kent for keeping us up to speed on this very important issue.
Kent, once again, you have swept up random information and packaged it so that it makes a powerful point. Thanks for the links to write our Congressional representatives.
This is a great and very well-timed post. There are many things that are being discussed these days – things to help those on main street – but if something could be done on this, as buckeyedoc says, many of the people who most need it would benefit. Thanks, Kent.
Payday loans... grrrr. I believe there's a special space in hell reserved for those places.

Good points.
I'll just quickly repeat a quote from the "usury" wiki page that Kent linked to:

"When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not." (Blackstone's Commentaries on the Laws of England, p. 1336).

Other than that, I think Al Loomis has a reasonable point, but I'll respect Kent's wishes and defer that topic until a future post of his.
Thanks, Don. I realize the request is awkward, but that thread will hopefully go out tonight and then you'll see the issue and I'm sure you'll have plenty to say about that one. :)
Don and Al, the article I'm trying to write on credit cards has many parts, so I keep carving them off into smaller ones. I put up another piece of it today on the issue of whether credit card terms are voluntary. There's still another piece coming soon on the issue of why people use credit cards—and probably some others, too.
Well, you've certainly cheered me up Ken. I can't believe that S.3287 seeks to limit "Unreasonable Credit Rates" by using a maximum of 36%. If that's not unreasonable, I don't know what is! By the way, at the start of the credit crisis, I transferred a balance with (what I thought was) a high interest rate - 24% - to a new card with an introductory offer of 2.99%. I figured I'd better transfer the debt while I had the chance. When the statement arrived, they had not set the interest rate at 2.99% as advertised but at 9.99% with an interest rate of 36% once the promotional period ends! How can this be legal? It sounds like a bait and switch to me. I appreciate you bringing credit card companies' shady practices to light.
Lisa, I did some similar shuffling on my cards and one thing I noticed was that there were fine print exemptions saying if you swapped from one card to another owned by the same bank, it didn't count. With today's megacorporations, there are a lot of cards that are really with the same bank just branded differently. Is it possible that's what happened? If you didn't get the rate you were promised, you should certainly complain. But often these things are full of restrictions and it's easy to make a disastrous mistake.