Every day thousands of consumers — hard working businessmen and women, mothers, fathers, grandmothers, students — walk through airport security where their purses, bags and wallets are screened and cleared on their way to their new destinations. Yet, unbeknownst to their carriers and their fellow passengers, they are carrying highly explosive materials onto their planes — ticking time bombs in the form of little pieces of plastic, that could blow up at any moment and incite what could amount to personal financial terror.

I am, of course, talking about credit cards, because the banks that issue them have had the ability for years to explosively increase the interest rates on your outstanding balances for virtually any reason. Through the artifice of carefully thought out contract provisions and court precedents in selective states, banks have had free reign to set off their own version of a hidden bomb, which consumers have carried willingly after being aggressively solicited and enticed into playing the card issuers’ profit making game.

I’ve Been “Jacked”!

The explosions set off by card issuers when they cause your interest rates to go through the roof, and thus increase the minimum payments and the cost of the purchases you already made with the card and had budgeted for can set off other explosions in your vicinity — the rates on other cards in your purse or wallet may blow up too. While it can only take one rate increase to ruin an already weak budget, a series of such explosions often leads to the destruction of a consumer’s finances and bankruptcy.

Interest rate increases on credit cards have  been a HUGE source of profits for banks, but the current recession and the joblessness faced by millions of card holders has caused the detonation of their little bombs (which banks handed out like candy prior to the recession) to blow up in their faces.

The default rate on these credit card accounts are at historic highs. For more on this, please read this recent post on Mike Shedlock’s (Mish) blog: reflections-on-credit-card-fees-and-chargeoffs.

Now, however, with the soon to be enacted CARD ACT, many of the banks’ trick and trap policies, which were designed to ensnare the public into becoming debt servicing slaves, are about to be curbed. However, banks will and have already begun to adjust to the coming new reality by finding new ways to profit from their plastic explosives.

One way they are doing that is by switching consumers’ interest rates from fixed to variable rates based on a formula that might charge say 12.9% above prime. Although this switch may not seem like a big deal right now with federal interest rates at historic lows, those rates will most certainly rise in the not too distant future, perhaps significantly, and when they do, the cost of using their credit cards will increase for consumers. In other words, those plastic explosives will detonate in consumers’ wallets yet again, sending potentially more shock waves through their finances. And unfortunately, I suspect that the timing of these future interest rate increases will come at a time when our economy is widely recognized to be solidly on the path to recovery.

For another example of how far those who issue standard grade plastic explosives in the name of profit will go to get around the CARD ACT, please read nationally-syndicated personal finance columnist Kathy Kristof’s personal story in her recent blog post, Credit Reform and My New 703.8% Card.

Kristof wrote:
“Consumer reporters were all crowing about a 79.99% rate credit card that was launched in response to credit reform a few months ago–collectively horrified that a law designed to cut rates and eliminate sneaky fees was inspiring increasingly abusive bank behavior. I thought that was about as bad as it gets until I took a close look at the statement for my new Macy’s card, which I had opened with “instant credit” while Christmas shopping. It made that 79% card look like a bargain.”

Kristof went on to explain that based on her average daily balance of $3.41, her minimum charge worked out to “an actual annual percentage rate” of 703.80%!!!! Also, her blog linked to a good resource over at www.getrichslowly.org for additional information about the CARD ACT. Click: An Act To Inhibit The Placement Of Small Incendiary Devices Upon American Citizens to read more.

For additional information about the CARD ACT and to learn how you can win free help from Consumer Recovery Network, a fair and ethical debt settlement firm, by sending it your personal story of what happened to you when one of your banks triggered your plastic explosive and the rate on your credit card went sky high, visit CARD ACT-CRN Contest.

Credit Carnage

More than half of the debt-stressed consumers my company has consulted with over the past several years has indicated that “a plastic explosion” was a key factor in their being unable to keep up with their debts. Furthermore, if you’ve been hit by plastic shrapnel, I know that you will easily relate to the analogies I have used here. I know they are appropriate because I work with the carnage of these explosions every day.

Looked at in this perspective, card issuers and their fee traps have already blown up the finances of millions of consumers. How many more explosions will we see between now and February 22nd when rate jacking, as we have known it, will end? While I see the variable interest rate ticking time bomb referenced earlier in this blog as having the greatest potential to spark renewed controversy over credit cards, many card issuers have already mentioned they will revert back to the annual fees they charged years ago and that they will also be limiting the rewards programs that they used to compete for market share and consumer loyalty.

{So, what’s in your wallet?}

By the way, a great place to compare credit card interest rates and reward programs and to read consumer feedback about specific cards is “Credit Card Ratings”. Now, more than ever, in this rapidly changing credit card marketplace, it is important that you use respected, reliable resources to research and understand the credit products you are using or considering using.

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