Patrick's Rants

PBS reran an episode of Frontline last night that first ran in Nov, 2004. It is an enlightening piece on the expansion of the credit card industry. All of the puzzle pieces fit logically together… that is at first. Logically, South Dakota made the wise choice back in 1980 to save their state by raising the usury rates. It made sense for South Dakota to do this. The economy was in the dumper and the rates that banks were allowed to charge were less than what it cost the bank to borrow the money they were lending. In order to not have the economy collapse completely, the banks had to be able to charge more of their borrowers than they paid to their lenders. This was spurred on by a little company called Citibank that was drowning in New York’s usury rate laws. Citibank was paying twice the rate that it was able to charge its customers. Logically, Citibank had to change or die; it could not afford to charge 9.9% and pay nearly 20%. So Citibank called South Dakota’s governer, encouraging the state legislature to change the usury cap (even helping to write the law) and moved their credit card division to South Dakota. It’s been downhill for consumers ever since.
The turning points for the credit card industry are a couple of Supreme Court rulings: the first allows banks to “export” their interest rate, the second uncaps the penalty fees which used to typically run $5 to $10. Banks were no longer subject to the laws of the state their customers lived in, but where the credit was granted – move to a high interest rate state and they can charge that rate to all of their customers. They can also charge more than the previous standard of $5 to $10 penalty. Today $25, $29, even as high as $39 penalties for being late, over the limit or bouncing a check to the credit card company are normal.
Now, here’s how they really get you. First they started charging an annual fee. Then they lowered the standard 5% minimum monthly payment – 2% is now normal – raising the “affordable” balances to around 2 times what they were previously. Then some banks have added something called “Universal Default”
Universal Default is a banking term that roughly translated means “screw you”. Here’s how it works. You would think that your credit card company only cares how you treat them, not true. They care if you are late to them, sure. But they also look to see how you treat “other” companies to determine what risk you are to them. You can be the perfect borrower with a lovely credit score calculated by the Fair Isaac Corporation and get great rates on loans and credit cards. Your credit card company, however regularly monitors your credit. If you are late to another company, over the limit, close to your limit, if you have more credit than you used to – or even worse, someone opened credit in your name – your bank may invoke Universal Default (“screw you” in English). Buried in the fine print (and what isn’t?) you might find that your bank has the “right” to change the terms of your relationship to bump your interest rate to over 30%, cancel your charge privileges and become your worst nightmare, all while financially raping their customer, you. A serious offender in this category is Chase. I have seen Chase statements (not mine) where $199.54 interest is charged and the minimum payment is $200.00. They will never be paid back unless the customer pays more than the minimum or manages to pay off the card. More than likely, this creates a state of dispair for the customer who throws up their hands and says, “fuck it. I can never pay them off, I’ll stop trying,” and goes from “Universal Default” (an imaginary, made up form of default where the company UDing the consumer was never actually harmed) to real default and possible bankruptcy… which causes the card company to lobby Congress to rewrite the Banruptcy code as their final “screw you” to their customers.
Happy Holidays

1. Frontline Credit Card Show
2. Jump straight to the history of the card business
3. $5000.00 at 15% interest, minimum payment = $100.00 /mo = 6.58 yrs (except that the payment drops a little each month due to the $5000 being slowly reduced – after a year of $100 payments this 2% is around $90 – if you keep making the minimum payment you stretch it out even longer)
4. MyFICO Get your credit score, check for mistakes and fraud