Monday, February 16, 2009

Putting the Screws to Cardholders

Credit cards have become a sore spot for banking customers.

Banks, too many of them, have been stung by losses on loans, and hope they can make up some of the difference from credit card customers. And they’ve been trying to do that by catching consumers in a weak moment and putting the screws to them, typically by lowering the credit limit or raising the interest rate in a way that the bank hopes will lead to more fees. Some of those fees, meanwhile, have gone up from $19 to $97. These are just a few of the ploys that have been documented:

  • Freezing an account when the account holder becomes unemployed or is admitted to the hospital
  • Changing account terms while the account holder is overseas
  • Automatically raising the interest rate when the account holder pays money to a college or university
  • Automatically lowering the credit limit when the account holder uses more than 30 percent of the limit

And here are three signs of the level of resentment this business approach has inspired:

  • In a Shamanic Economist poll asking what services people would be most likely to seek out from a government-run “bad bank”, more than a third of respondents picked a credit card, the “Bad Visa.”
  • In a Los Angeles Times survey today asking “Are banks gouging credit cardholders?”, 87 percent said yes, and only 2 percent said no.
  • The Bush administration, made up mostly of Republicans, felt it had to draw up new rules to protect credit card customers.

The new rules go into effect next year, and banks are already figuring out ways around them. Based on the Los Angeles Times story, the largest banks seem to have agreed on the strategy of raising the interest rate each payment due date to the highest rate allowed by law, if the payment has not yet been received. If you hold a card from one of these banks, you’ll be paying the bank an almost-loan-shark interest rate of 30 percent if any payment you make is ever one day late. The only way to avoid this risk as a cardholder is to be prepared to pay off your credit card balance in full at the drop of a hat.

Carrying a credit card balance that is more than one month of after-tax income has become a grave risk. At a 30 percent rate, it could take more than a year to pay that amount off. Owing one year’s income on a credit card has never been a good idea, but if you owe one year’s income at a 30 percent interest rate, it is almost impossible to avoid the downward spiral into bankruptcy.

If you must carry a balance, it becomes especially important to make your payment the day you receive the credit card statement, then verify that the payment was received. This way, if something goes wrong and the bank does not receive the payment, you will have a second chance to get your payment in before the due date. Better yet, it is emphatically time for everyone who can to pay off their credit card balances. Put yourself in a stronger financial position, and when banks try to put the screws to you, you can just laugh at them. These days, that’s a good position to be in.