I have long held the position: If banks cannot be profitable by lending money at no higher than 15% interest, they should be considered too incompetent to be a bank.

Currently the cost of money for the banks is next to nothing, but they loan it out charging consumers as much as 30%. That is quite a spread!

The argument I hear for high interest rates is often one of risk. The banks use available data from resources like your credit report which may (or may not) suggest that your behavior reflects a higher risk of default. This risk data is then used, by applying some twisted logic, as justification for increasing your interest rates. Let’s see… some arbitrary or even actual data shows an account holder is at higher risk for not being able to make one of their payments and so the bank’s solution is to increase your rates making your payment higher than those at a lower risk. Gee, that’ll assure timely payment! How’s that working for ya Mr. Banker?

Judging from the increase in bankruptcies, delinquencies and charge offs… Not so much!

Obviously, the current job market is adding to the payment pressure consumers are under, but even those who are employed are often just one interest rate increase away from the edge of a financial cliff. I speak to them daily.

This Bloomberg article from yesterday: A CLUE, shows that some in a position to affect change, via the proposed legislation, actually get it.  It doesn’t take a crystal ball to see that a cap on interest rates will provide for a future where consumers can actually afford to borrow, spend, and successfully pay back their debt, thereby assisting in an economic recovery. There are lawmakers who possess, or are willing to borrow from their constituents, the backbone needed to support a return to sound lending principles.

Yes, I understand that we are approaching an election cycle and perhaps there is a desire by politicians to look good at home, but this legislation has never been more relevant than it is today.

Let’s hope it gets the traction it needs this time!

FTC Sues Three Companies Marketing Bogus Credit Card Rate Reduction Programs to Consumers

The FTC announced this week that it had filed lawsuits against three companies: Economic Relief Technologies LLC, Dynamic Financial Group (U.S.A.) Inc., and JPM Accelerated Services, http://www.ftc.gov/opa/2009/12/robocall.shtm. The lawsuits, which were filed in Florida, Georgia and Ilinois, allege that the companies have been marketing worthless credit card interest rate reduction programs to consumers via automated phone calls, also known as ‘robo” calls. According to the FTC, not only have the companies failed to deliver on their promises, but their calls have violated the federal Telemarketing the Do Not Call Rules.

Telemarketers working for the three companies told consumers who were interested in the program that the program would allow them to save thousands of dollars in interest within a short period of time and would make it possible for them to pay off their debts faster. Consumers were also told that to achieve these benefits they would have to pay as much as $1,495 up-front, but were promised that if they did not save a “guaranteed” amount — usually $2,500 — they could get their up-front payment back. Few consumers ever received a refund however.

Consumers who want to learn more about their rights and responsibilities regarding pre-recorded telemarketing calls, should read the following two FTC alerts: New Rules for Robocalls and Reining in Robocalls, which can be found at http://ftc.gov/bcp/edu/pubs/consumer/alerts/alt162.shtm and http://ftc.gov/bcp/edu/pubs/business/alerts/alt161.shtm.

Consumers should know that they have just as much likelihood (if not more) of successfully reducing their interest rates with their creditors on their own rather than by paying someone to attempt to do it for them. If you try it on your own and you hit a brick wall, do not get discouraged. Try again a week or so later and you may have success.

One little tip for those consumers whose high interest rate credit cards may force them to make a payment late: Missing a payment by as a little as a week or two will often give your account a different status that will qualify you for interest rate and minimum payment reductions that were curiously unavailable to you prior to your late payment. However, I must stress that this strategy for getting such reductions is only appropriate for someone who was already unlikely to be able to meet the minimum payment requirement.

More than half of all of the consumers that have consulted with Consumer Recovery Network, an ethical, consumer-friendly debt settlement firm, over the past two years have indicated that credit card rate increases had made it harder for them to keep up with their monthly account payments. Why are these increases happening? In many cases it’s because of something called the universal default, a provision that’s in most credit card agreements.

The universal default clause gives banks the right to increase your credit card rates for virtually any reason. I refer to the practice as rate jacking. Whatever you call it, the practice is bad news for consumers. You can be rate jacked even if you were never late making a payment on the credit card with the increased rate!! Basically, the universal default clause gives banks free rein to increase the interest rate you must pay on your outstanding credit card balances for just about any reason.

Here’s how rate jacking works: After conducting a periodic review of your credit history, the creditor decides that you are too close to your credit limit on some of your credit accounts, notices that you were late making a payment on one of those accounts, or discovers that you recently opened one or more new accounts. As a result, it raises the rate on your current balance and on any new purchases you may make with your credit card. If your finances are already shaky, having that rate increased may be all it takes to push you over the edge, especially if your other card issuers follow suit once they see that you’ve already been rate jacked.

If you are about to be rate jacked, the creditor will send you a notice telling you that your interest rate is going up. When you receive the notice, write the card issuer to clearly state that you do not agree to the change in terms and that you will not be using your card anymore. If you don’t and you use the card after the effective date of the rate increase, you’ll have implied to the card issuer that you agree to the new terms of credit.

You should also call the customer service number on the back of the card to cancel the account. A couple months later, order copies of your credit reports to confirm that they show that the account was canceled and to make sure that each of the reports show that you did the canceling, not the card issuer. (Note: Although your credit score will take a hit when you cancel an account, the damage won’t be as bad as if the card issuer does the canceling.) If there are any automatic debits scheduled for the account you are going to close transfer them to a different account.

In our current economy, we can expect creditors to become more risk averse. It makes sense that they would begin practicing restraint again. However, arbitrarily charging consumers additional interest on their credit card balances, especially considering that not very long ago banks were encouraging those very same consumers to use their credit cards for everything and making it easy for them to get cash advances from their accounts, is tantamount to theft. Furthermore, in many instances it does the very thing that banks want to avoid — causes consumers to default on their accounts! But for now, rate jacking is legal. However in February 2010, when the Credit Card Accountability Responsibility and Disclosure Act of 2009 goes into effect, rate jacking will, for seemingly arbitrary reasons, become illegal. Until then however we can expect to hear a lot more about it. Recently for example, Citibank announced that it had rate jacked 15 million of its account holders.

If you’ve been rate jacked and have hit the debt wall, or if you are simply struggling to keep up with your credit card debts, explore your options, including setting up a debt management plan with a reputable nonprofit credit counseling agency, settling your debts or filing for bankruptcy. For information on these options and help deciding which one is best for you, go to Consumer Recovery Network.

Authored by: Michael Bovee
CRN Pres. & Specialist