In days gone, if you needed money and had no collateral, you went to a loan shark. You paid exorbitant interest rates and if you failed to make the payments; you paid the penalty - a baseball bat to the kneecaps. It's kind of like that with credit cards. The principles are the same except the abuse is financial instead of physical. You are pounded with late fees, higher interest rates, and negative entrees on your credit report. You might expect this treatment from a loan shark but legally from major US corporations? This is America and we have laws to protect us - not anymore.
In the 80's credit was deregulated and, what should be a fair and responsible industry, turned into an elaborate con game. Poorly written deregulation legislation by Congress eliminated the limit on the interest rate a lender can charge a borrower. Seizing the opportunity, the credit card industry amassed teams of lawyers to develop new credit card "Terms and Conditions" designed to confuse and blindside their customers. Just like the loan sharks of old, the industry could now charge what they pleased and change the rules after the cards were issued and used. As stated by Elizabeth Warren during a PBS Frontline interview, " I don't know any merchant in America who can change the price after you've bought the item except a credit card company. After you have borrowed the $5,000, they can change the interest rate from 9.9 percent to 29.9 percent... They put it all in clauses that people can't read. They put it all in things like "universal default terms" and "15 days to change the terms of this contract" and arbitration agreements ... They have teams of lawyers to figure out just the way to write the contracts that will maximize the profits for the credit card companies and minimize the likelihood that any customer will quite figure out what has happened when he or she uses that credit card. " (A must read for everyone, visit http://www.pbs.org/wgbh/pages/frontline/shows/credit/interviews/warren.html )
Credit card debt and industry profits are at all time highs; as are bad debts written off by credit card companies and personal bankruptcies. Last year, industry profits for the credit card sector reached a record $30 billion, including penalty fees totaling $12 billion. Today, more than 100 million households carry an average credit card balance of more than $8 thousand monthly and interest and fees on the monthly payments account for eighty-five percent of the industry's total yearly profits. Each year over a million families file for bankruptcy. Experts contend that by 2010, if we continue with a deregulated credit industry, one in every seven families with children in America will have declared bankruptcy. Warren and other critics contend; "These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print..." Deceptive tactics designed specifically to trap the consumer - and it's successful.
The credit card trap is waiting to snare you at any time. Medical emergencies, loss of a job, major home or auto repairs, or numerous other misfortunes can cause you to use and not pay promptly. When this occurs, there are no grace periods, you are snared and the credit card predators attack. But instead of mercifully putting you out of your misery, they peck at you by including late and over-limit fees and up to three times the original interest rate. They ruin your credit rating but keep you alive by letting you make the minimum payment. The pecking continues until you succumb or you miraculously escape by paying up to four or more times the original debt. Why do we let this happen?
We use credit cards for their anytime credit accessibility, the safety and convenience of not carrying cash, and worldwide acceptability. According to consumer advocates and bankers, we fail to pay them off monthly because we are "financially uniformed". As stated by Ed Yingling, executive vice president of the American Bankers Association, "Consumers are in the driver's seat when it comes to managing their personal finance... Since our schools, unfortunately, seldom teach personal finance skills, banks and others have been working to fill the gap... You just can't build a long-term financial relationship with someone who mismanages their personal finances..." Yeah right, and the textbook is the credit card's "Terms and Conditions". You may have to take the course frequently because the banks can change the terms and conditions at any time for any reason with a 15 day written notice.
Even the new Bankruptcy Reform Act, filled with industry favoritism, fails to address the real issue - a deregulated industry due to Washington hypocrisy. The largest political contributions to Congressional and Administration campaigns have come from the credit card companies, greater than even the powerful oil and pharmaceutical sectors. The results are evidenced in the Bankruptcy Reform Act which makes it much more difficult for consumers to eliminate their credit card debt - a major profit plus for the credit card companies. Also, it reiterates the lobbyists' theme; the real problem isn't that the credit card industry is taking advantage of deregulation, it's that we have a "financially uninformed" public. Provisions of the new reform act require credit counseling prior to filing for bankruptcy and on-going personal finance courses following bankruptcy proceedings. "The problem is that credit card companies want to have it both ways," says Sen. Chris Dodd (D-Conn.). "On one hand, they want unfettered access to new customers, irrespective of whether these new customers are financially literate, or have the ability to repay the debts they incur. At the same time, they want to be protected when they overextend credit to these very same customers."
Admittedly, we do not have to use credit cards and when we do, we can avoid penalties by paying the bill in full and on time. In the credit card industry these "financially informed" individuals are known as "deadbeats" since the profits generated are significantly less than the remaining "financially uninformed". Whether you are a deadbeat or not, be careful.
1) Never get a cash advance on a credit card. The advance fee is exorbitant and the interest rates, which start immediately (not in 30days), are much greater than the standard rate for purchases. Always shred the credit card convenience checks included in your statement. These are treated as cash advances by the credit card company and are vulnerable to identity theft.
2) Always know and pay your statement well in advance of the due date and online, if possible. Not that the postal service or credit card accounting departments can't be trusted, but there are no grace periods and the due dates continually change to trap you into paying late. Once you are late, you will be charged a late fee and your interest rate increased. By paying online you can immediately print the payment confirmation as proof of payment should disputes arise.
3) Be careful of due dates falling on a Sunday or a holiday. Your payment, even online, must be paid on a workday and by certain time limit, generally 2:00 pm. For example, if the due date is Sunday and you pay online Friday night or after 2:00 pm, you are late and you will receive a late fee or worse.
4) Watch out for low introductory rates on balance transfers. You are not being singled out because you are good credit risk, but because the bank wants to steal the debt from their competitors. They know that after the introductory period they will get the high interest and penalty fees from you and increase their profits, not to mention the large up-front transfer fee and possibly higher long-term interest rates.
5) Watch for unexpected interest rate increases resulting from the "universal default" clause. From your credit report they can rate you as a high risk at any time and for any reason, even if you are current on you credit card payments. This is also true if your credit card balance is approaching your credit limit.
6) Never exceed the credit limit. This is an easy one to let slip, especially if you use your credit card for incidental purchases. Again, expect a hefty over-limit fee and an increase in purchase and cash advance interest rates. Similarly, if you use a debit card, be sure you accurately account for each purchase. For example, if you have authorized automatic withdrawal of your house payment and you forget to deduct the coke you purchased at McDonalds; and your balance is a penny short, you will pay a bounced check fee, a mortgage lender late fee, and your credit report will reflect a late payment. Now, you are subject to the universal default clause on your credit card accounts or other unsecured loans.
7) Eyeing the huge profits of the credit card industry, all types of businesses have jumped on the bandwagon. Department stores, home improvement centers, home finance companies, oil companies, and essentially all other unsecured loan providers - most with similar terms and conditions.
Few would argue that any business should make a fair and reasonable profit. But 30% interest rates, outrageous fees, and less than full disclosure of terms are unfair and unreasonable, but legal. The credit card industry highlights a disturbing trend; namely, the primary objective of certain industries is not to provide their customers' value, but to control the regulatory process and maximize profits by any means to exceed Wall Street earnings estimates. To promote this agenda these industries spend billions each year in bipartisan contributions to Congressional and Presidential campaigns and maintain large lobbies to influence legislative and regulatory decisions. The result, sector profits are up, executive salaries are up, and unreasonable costs are passed on to the consumer; primarily the middle class. In Congress the rhetoric continues, but solutions such as campaign finance reform, credit reform, energy policy, healthcare reform, and others languish. If enacted, legislation is ineffective and generally enhances the industry positions. Only by becoming both "financially informed" and "politically aware" can we hope to effect positive change - using our pocketbooks and votes wisely.
Even if you are "financially informed", be cautious and fully understand the "Terms and Conditions" related to any manner of debt. If you are "financially uninformed', do the same and visit http://Free-MoneyGuide.com for additional education.
