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 credit card 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.
Raising Rates on One Card can Set off Another
The explosions set off by card issuers when they cause your credit card 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 even bankruptcy.
Credit card interest rate increases 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’ card 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 Get Rich Slowly for additional information about the CARD ACT.
Carnage from High Credit Card Rates
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?}
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.
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