We need increased consumer protection because not all companies issuing consumer products -- credit cards and mortgages being the best examples -- play by the rules.
Obviously lenders need to make money. Therefore, any bank issuing an advance on a credit card or money secured with a mortgage has to earn a rate of return. And, there should be (and are of course) fees for late payment, overdrafts and other failures to meet the terms of a credit card or mortgage agreement.
My gripe begins when lenders don't play above board. Improper disclosures, microscopic fine print, fees out of line with costs, notices that look like junk mail. These are all examples of how lenders attempt to trick consumers into incurring too much debt or paying higher fees than they should.
These practices are the result of some lenders drive to maximize profit at all costs. A sense of fair play gives way to great pay.
One example is the minimum monthly payment that appears on every credit card bill. Here's the history: lenders used to require credit card holders to pay 5% or more of total debt with every monthly bill. Then one day a clever credit card consultant said:
"Hey, why not lower the minimum payment to 2%? If we call it the 'minimum' or 'required' monthly payment, cardholders will think that paying that amount is prudent. But, in fact, the truth is that by making such a small payment, they will be paying us a lot more interest and they will also stay in debt a lot longer. How great is that?"
And most card companies followed this guy's advice - helping to create lots and lots of credit card debt (about $9,000 per cardholder on average).
Using semantics - "required minimum payment" - to trick people into poor financial habits is "dirty pool." I'd like to say that it's just one example but there are many others for some lenders will do whatever they need to bulk up profits.
The new credit card law (The Credit Card Act of 2009) does address the "minimum required payment" verbiage by requiring card companies to post on every monthly invoice how long it will take to get out of debt if one pays only the minimum payment. But, not every cardholder will see it. Some won't understand the implication. And while the notice is better than nothing, it's just one small effort in the war against unfair and deceptive tactics employed by some lenders to prod consumers into too much debt or larded up fees.
Jim Randel is the founder of the award-winning Skinny On™ book series.