When Plastic Nickels and Dimes

One of the particularly exasperating characteristics of the current financial crisis is that the institutions responsible for the crisis are on kamikaze missions: as they go down, they exact maximum damage on their customers and on the economy at large before crashing and burning. This is, in part, simply due to organizational decision making: an organization's leadership will attempt to keep a firm afloat as long as possible, no matter the larger social and economic costs.

Credit card companies are currently on such a destructive mission. Credit card defaults, long feared as the financial crisis's second coming (after housing defaults), are at their highest level in 20 years with so-called "charge offs" -- the amount a credit card company believes it will never be repaid -- rising significantly in recent months to 8.7% at American Express and 9.33% at Citigroup. As a consequence, credit card companies are squeezing their remaining customers dry. As James Surowiecki pointed out in last week's New Yorker:

[C]redit-card companies have had to rein in their lending and shed accounts. Since that risks shrinking profits, they're also trying to get as much as they can out of their existing customers, by doing things like sharply increasing their interest rates.

Apologists call these increased interest rates "risk-based pricing", which they claim allows credit card companies to keep credit widely available. But Adam Levitin at CreditSlips undermines this claim, made recently by Meredith Whitney in the Wall Street Journal:

Just as an insurer cannot decide premiums after the coverage event occurs, so too can a lender not decide what interest rates apply after the borrowing. Pricing after a risk materializes isn't risk-based pricing. It's rent extraction.

The larger story involved with consumer-adverse lending practices is laid out in an interesting article by Thomas Geoghegan in next month's Harper's ("At interest rates of 25 percent, or 50 percent, or 500 percent, lenders don't really want the loan to be repaid -- they want us to be irresponsible, or at least to have a certain amount of bad character"). But the particular pain being exacted on individual consumers and on small business owners (are you listening, John Boehner?) by increased interest rates at a particularly bad economic time for American households is the simple and all-too-familiar story of failed regulation.

Just over a year ago, Rep. Carolyn Maloney introduced legislation -- the Credit Cardholders' Bill of Rights -- to prohibit credit card companies from instituting these very interest rate increases on outstanding card balances. The House passed the legislation last September, but it died in the Senate. At the same time, the Federal Reserve has drafted its own rules to regulate credit card lending which, to the Fed's credit, include a provision mirroring that of the Cardholders' Bill of Rights. The problem is that the Fed's prohibition on retroactive interest rate hikes does not take effect until July of 2010.

As the economy continues to sour and unemployment rises, credit defaults will only worsen and credit card companies will extract even higher interest rates and more fees from vulnerable households and small businesses. The lack of regulation not only eased us into this financial crisis, but is exacerbating the pain it inflicts on us.

Comments

[SingingGuy]

I feel like this is the the mortgage meltdown crisis all over again. It's out there looming and getting larger and more toxic every day, but precious little is being done about it NOW. Actions need to be taken at the legislative level right away that will address these credit card companies and their vicious "gotcha" practices. Don't wait until it's another tsunami of default that will further overwhelm the economic system.

Just as an aside…We've come to a time where the term "bank robber" has turned the tables. Now it applies to how the banks are treating us!

[johnsopinion]

Stop confusing 'need' with 'want.'

If you can't pay cash for it, you don't need it. It's a "I want that" product.
It looks delicious or pretty on the shelf, but do you NEED it?
Everything "out there" is designed to take your money out of your pocket
and put it in someone else's. How long can your pocketbook sustain your
"wants."

[Sundialsvc4]

Time to read the Book of Deuteronomy. Or maybe, "A Christmas Carol." Or, "Oliver Twist."

It's called: usury.

It was, and is, a reprehensible crime, which at one time was the subject of a society's most vociferous damnations. You could get your right hand chopped-off for it, just like a common thief's.

But today, the banking and finance industries are dripping with corruption ... and with folly. They have taken care to make sure that Senators and Congressmen feel themselves firmly in-bed with them, and they continue to dream that there is no world outside the four walls of this country.

The leprechaun has come, and the leprechaun has gone. Trillions of "dollars" are ... nothing but zeroes.

Are credit-card holders "defaulting," or simply refusing to pay? Could it be that if you simply (were forced by law to...of course...b­ecause banks are frankly too-stupid to do it otherwise.­..) LOWERED the price of your product and restored FAIR terms to your agreement, they might start paying the bills again?

So you took a $2,500 credit card, jacked the interest rates and fees and penalties until now you say I owe you $4,300? (And of course you sold that "security" off to some sucker.) Read my lips: "whistle for it." If and when you are ready to negotiate, you'll get paid. A customer's greatest weapon is still: "I won't pay!"

[Arithrianos]

i wholeheartedly agree, i stopped paying after the only card i carried went up to 29.99% interest. I do feel sorry for whatever sucker bought my debt, but i feel nothing for the credit card co.

[ThePeacemakers]

Long term, it seems if they kept the interest rates lower, even for those who are behind, the people wouldn't panic at the soaring interest rates and default. They would have a better chance of paying off the debt over time.

A larger percentage making payments, because they're able to see the light at the end of the tunnel instead of freaking out because of astronomical rises in payments due these criminal interest rates.

But these greed mongerers are only looking for short term profits...­their quarterly profits.

They started raising interest rates the more they hear about layoffs because they can smell interest payments.

Stop defending these bastards practices. (Not referring to the content of the article, but posts that make it seem like people are being totally irresponsible for getting behind on payments in this economic climate of layoffs and astronomical health care costs)

[KillTheMessenger]

Look who failed to read the contract..­. pretty much everyone who ever used a credit card to get "credit".

The solution is simple.

PAY IT BACK! TAKE SCISSORS! CUT, CUT CUT!

Do you need more detailed instructions?

[KillTheMessenger]

Credit card debt too expensive? Should have called Mr. Scissors early and often!

:-)

[Sundialsvc4]

It's a thoroughly rigged game, and easily the most-expensive money that money can buy. Nevertheless, it's an essential service that must be provided under fair and equitable terms, under reasonable interest rates, with transparency and accountability with regard to collection practices and credit ratings.

It may well be that the biggest banks and lending-houses WILL FAIL for lack of a competent businessman. I see not one scrap of "business sense" anywhere in the house.

[KillTheMessenger]

"Nevertheless, it's an essential service...­"

That very few Europeans have (or at leas had) access to. I never had a credit card in Europe. The banks don't trust you with your own money, so at best you can get a Eurocard (which is similar to a debit card) which has a 400 Euro (I believe) limit on every single transaction. If you want to buy something for, say, 1100 Euros, you need to do three transactions on the same card.

And, yet, people live. So the "essentiality" (no, it's not a word, but it sounds funny) of credit cards is kind of questionable. I could do without. My parents have to do without. No big deal.

[USA1776]

Anybody looking into EdFund yet on their collection of Federal student loan debt and their hardship criteria for wage garnishment ? It is a good story!!!!!!!!!!

[Bethab]

Can you elaborate?