The Truth About Credit Cards and What To Do About It

The Truth About Credit Cards and What To Do About It

There is a lot of misinformation being propagated by the media and many financial professionals and personal finance gurus. The real problem is that almost everyone believes them. I won't talk about the specific myths here, because I do that in my book, but I am going to talk about the reality we are facing with credit cards as consumers. Credit cards do more to harm the financial health of households in the U.S. than any other financial instrument available. Interest rates almost brought down the banking industry in the early 1980s when banks were upside down on interest, paying out higher interest rates than what they were collecting on their established fixed rate loans. That was until they took advantage of a Supreme Court decision in 1978, Marquette vs. First Omaha Service Corp., which opened the door for unlimited interest rates, even in states where interest rates were limited. This is done by virtue of the national bank basing their operations in a state with no interest rate limit. (Bankrate.com, "The Higher the Balance, The Higher The Late Fee", by Lucy Lazarony, Feb. 27, 2003) That is why Citibank is based in South Dakota. Special political deals were made with the state's Governor to allow this kind of practice to be legal. That is because in 1980 the South Dakota economy was in trouble. Citibank seized the opportunity and agreed to relocate their corporate offices to escape the usury laws they were under at the time.

Today, credit card holders are subjected to abusive agreements that are loaded with tricks and traps that catch them in snares that they cannot escape from. When trapped, they pay interest rates up to 34% and fees such as late fees which actually calculate to an effective 400% APR in many cases for defaulting accounts when you include fees. Then there is over limit fees, double cycle billing interest rate calculations, grace periods that disappear, mysterious phone charges, and lately a re-emerging annual fee. The agreements are difficult even for an attorney to decipher. Card holders think they are gaming the system by paying off their balances every month and accumulating frequent flier miles and other kinds of rewards. But the reality is that very few of those miles actually get cashed in before they expire, due to the ever increasing limitations on their use. In the meantime, consumers spend 12% to 18% more when using credit cards instead of cash, according to the American Bankers Association. Banking industry associations admit that defaulting cardholders are the sweet spot of the industry, where 75% of the profits are generated. In 2005, interest and penalties accounted for almost $80 billion in revenues. (Bank Card Profitability, 2005-2004, CardWeb 2006)

Credit card companies have been targeting customers who are likely to default and they craft their agreements carefully to make them confusing and contradictory. They use open ended contract terms where they can change the agreement with an easy to miss notice in the mail. This also allows them to default customers on the slightest infractions. At that point they can enforce the default terms of the agreement without notice to the cardholder. This has come to be known as "universal default". The industry denies the practice, but evidence of consumer complaints shows it is widely practiced and implemented.

The industry claims "risk based pricing" is used to charge interest according to the customer's likelihood to default. However, the universal default practice has made it possible for them to default a customer for simply getting a small drop in their FICO score rating, a score that is fraught with errors from inaccurate reporting to creditors by the very companies that profit from the drop in scores. Isn't that a conflict of interest, and shouldn't it be illegal? The marketing message is the "Life Takes VISA", insinuating that it is a requirement to carry one in today's world. A marketing message that has been largely successful since most everyone believes it. Yet, it is more accurate to say that VISA takes life, because it is putting more Americans in debt with clever contracts and marketing tricks. What is the solution? Don't use credit cards. If Americans were driving cars that exploded without warning and millions died every day, they'd stop buying cars and find another mode of transportation. Why is it that Americans insist on using a product that is intent on defrauding them and causing millions of families financial hardship? I am amazed at how difficult it is for people to get this concept.