Dancing with the Devil

by Michael Hopping

Paying with plastic has become the American way. 

In good economic times most people were able to deal with high credit-card interest rates and shovelfuls of fees and penalty charges. But financial distress changes many things.

Since the U.S. Supreme Court essentially deregulated credit card interest rates in 1978, the game has been about offering cards to almost anyone, regardless of credit risk. Personal bankruptcies had already quadrupled by the mid-1990s, paralleling the rise in consumer debt associated with credit cards and related products. Banks offset these losses by increasing interest rates and transaction fees as they saw fit.

Neither banks nor consumers were prepared for last year’s economic
collapse. An explosion in the number of personal bankruptcies turned
cards, one of the banking industry’s best cash cows, into a loser.
Meanwhile Congress, seeking to protect consumers from predatory credit
card practices, passed the Credit Accountability, Responsibility and
Disclosure (CARD) Act of 2009. Though it won’t take full effect until
next July, credit card companies have responded with across-the-board
interest rate hikes. Senator Christopher Dodd (D-Connecticut)
introduced legislation to stop them, but prospects for passage seem
slim.

However this tit-for-tat plays out, the rules of the game are
shifting, perhaps dramatically. Two things, however, remain constant.
Consumers will spend money. And when they do it with plastic, the
companies issuing those credit, debit, or prepaid cards intend to make
money.

How they do it

Jamal (not his real name) works in consumer relations for a
credit card company. I showed him rate disclosure sheets for three
different credit cards and asked for an explanation of how the rules
are used to make money for issuers.

“First, they draw you in,” he said. Introductory interest rates
of 0% APR, high lines of credit, low minimum payments, and various
reward offers can seem like free money. Carrying a large balance isn’t
a problem until the interest rate jumps. Jamal showed me that the new
rate for the card offers we reviewed could vary between 11.99% and
29.99% depending on what triggered it. A late payment or purchases that
put a customer over her credit limit are common reasons for the highest
rates. These mistakes also generate occurrence fees, as high as $39 for
a single over-the-limit transaction.

Jamal encouraged customers to open their monthly statements
immediately and read them over. Changes to terms and conditions may be
announced in fine print that’s easy to overlook. The bill may also have
been delayed in the mail, making the due date sooner than expected.
Jamal advised mailing payments at least ten days prior to the due date.
If a holiday or other delay causes a payment to be posted after the due
date, too bad. Bring on the penalty fees and higher interest rates.
Over-the-limit transactions can sneak up on cardholders. Some issuers
don’t immediately cut off credit when the limit is reached. At $39 a
pop for mistakes, why should they? Sometimes the cause isn’t
overspending. Car rental companies impose temporary credit holds,
reducing available lines of credit. Or a credit limit may have been
reduced by the card issuer and announced in the fine print of a
statement. Regardless of fault, over-the-limit errors trigger penalties.

Until CARD outlaws the practice in February, Jamal expects
issuers to continue to apply bill payments to the parts of a customer’s
account paying the lowest interest rate first. (Cash advances and
balance transfers often carry higher interest rates than regular
balances, in addition to generating occurrence fees.) February will
also be the month when card companies are no longer able to raise
interest rates without advance warning.

What you can do about it

For the present, the best defense against fees and interest
rates is to pay off credit cards in full each month. Carrying a balance
for even a single month generates interest charges from the date of
purchase for at least two months.

Consumers who do carry balances may not be entirely helpless,
however. “Good customers,” defined by Jamal as those who use the card
regularly, always pay on time, never go over their limit, and have good
income and credit scores, have some leverage. They may be able to
negotiate lower interest rates or higher credit limits. And customers
shouldn’t necessarily be satisfied with a first offer of better terms.
“’Can you do better?’ is always a good question,” Jamal said. “It’s
important to be polite,” he added. “Angry requests are rejected.”

Less than good customers, including those who have lost a source
of income since they applied for their credit card, may actually lose
ground when trying to negotiate. Jamal said it’s been common this year
for credit limits to fall from thousands of dollars to a few hundred.
Inactive cards may be summarily cancelled.

Jamal told me that any customer can haggle about a late fee,
over-the-limit charge, or finance charge that pops up after a balance
is paid in full. He noted that there’s often a limit on these “fee
adjustments,” perhaps one per year.

Prepaid “credit” cards

Major issuers are now marketing products that mimic prepaid
phone and gift cards. The new bank cards may be purchased at retail
stores, “charged” with cash and used in the same way as a standard
debit card. Since the cardholder is spending his own money, there’s no
interest charge. The issuer takes his profit in fees. One prepaid card
available in Asheville has a purchase price of $4.95, plus a probable
monthly charge of $5.95, plus a variety of teller and ATM fees. Despite
the fees, such a card might make more sense than a traditional credit
card for some students and others with shaky credit.

The bottom line

The next several months are shaping up to be a time of major
change in the consumer credit industry. Holders of credit cards will do
well to pay close attention to card company notices, monthly statements
and seeming offers of better deals. CARD will benefit consumers in some
ways, but issuers will adapt to preserve their profit margins. Poorer
risk cardholders may be dropped. Others should be on the lookout for
decreased rewards, higher interest rates and/or new fee schemes.