Features > January 28, 2008

Killer Credit (cont’d)

Despite strong growth in labor productivity, hourly wages for most workers are not keeping up with inflation. In the last 20 years, incomes for the bottom 60 percent of households rose only 5 percent to 15 percent, according to the Bureau of Labor Statistics. Meanwhile, the average cost of living shot up 88 percent in that time.

Healthcare costs are a major contributor to this trend. A 2005 Commonwealth Fund study found that 77 million Americans age 19 and older “have difficulty paying medical bills, have accrued medical debt or both.” A Harvard review of 1,771 bankruptcy filings found that illness or medical bills were the cause of half of such filings, and that 75 percent of those who defaulted were initially insured.

But the problem extends further. As legislators disinvest from education, the average cost of college increased 165 percent between 1970 and 2005. In 2006 alone, it rose 6 percent, outpacing wages, inflation or financial aid.

What’s more, the housing bubble pushed prices through the roof, leading to the doubling of median mortgage debt from 1989 to 2004.

Childcare, transportation and food cause concerns, as well. And as personal savings are drained—Garcia estimates they are at the lowest levels since 1934—folks must choose between their plastic safety nets or financial ruin.

These facts were largely ignored when Congress passed the infamous bankruptcy bill of 2005. Restructuring the bankruptcy code was a major priority for credit card companies, as they claimed hundreds of thousands of debtors were frivolously filing for bankruptcy—thus discharging the debts they owed to the banks—when they had the means to cover the unpaid sum. In reality, this was a crisis entirely invented by the banks. The nonpartisan American Bankruptcy Institute estimates that only 3 percent of filers are able to discharge debts they can actually afford.

Mere facts didn’t stop the creditors. In 1997, lobbyists wrote the core of a bill that pushed more people from Chapter 7 bankruptcy into the less forgiving Chapter 13 bankruptcy, which forces households to accept three-year to five-year repayment plans on secured and unsecured debts. Although it stalled in the Senate numerous times, credit card companies and commercial banks pushed hard, donating $25 million and $75 million, respectively, to federal candidates and the political parties between 1999 and 2005. (See graph on page 28.) All that effort paid off in 2005 with so-called reforms that made it increasingly difficult for working households to crawl out from under their arrears.

Continuing crisis?

Although the current debt levels are foreboding enough on their own, last summer’s credit crunch elicits new, more unsettling fears. Like mortgages, credit card debt is often carved up and sold on global debt markets as securities. Since borrowers generally pay back what they owe, that debt has been profitable and safe for traders, which explains the $40 billion increase in securitized credit card debt from September 2005 to 2006.

However, credit cards are showing new signs of stress. When debt was cheap and housing prices were sky-high, many Americans used their homes as piggy banks, borrowing against them to finance both their debts and once-unattainable goods. Now, with the home-equity faucet forcibly shut off, over-leveraged borrowers are forced to find alternative ways to keep up with their bills, often ratcheting up credit card use to compensate.

New data from the Federal Reserve sheds light on this trend. In November 2007, credit card debt surged at an annual rate of 11.3 percent, a six-month high. For a comparison, credit card debt jumped 6.1 percent in 2006, and only 3.1 percent in 2005. Delinquency rates are also on the rise, albeit more slowly. For vulnerable working people, this new debt can be tough to cover.

These developments are problematic because credit card debt is unsecured, meaning no portion of defaults can be salvaged. Yet broader dangers lurk on a macro scale. If those bundled securities of debt decline in value, as mortgage-backed securities did last summer, banks and institutional investors (pensions, mutual funds, hedge funds) could all take a major hit, which could cause comparable damage to the broader economy.

England offers a disturbing precedent. The real estate market there buckled about 18 months ahead of the U.S. collapse. As banks tightened their lending criteria at the end of 2005, credit card delinquencies jumped as much as 50 percent. The British online publication Finance Markets reported that between March and November 2007, at least 10 percent of Britons were denied at least one credit card. The result? The total number of personal bankruptcies is expected to jump to at least 120,000 this year, estimates Grant Thornton, an accounting firm. That’s triple the number in 2004. In a recent poll by the U.K.-based price comparison website uSwitch.com, 23 percent of Brits called their current debt level “unmanageable.”

Like their counterparts overseas, U.S. credit card companies have been dealing with the lack of liquidity in self-interested ways. “Certain banks … don’t have any financial room,” says Manning, “which means they are going to have to squeeze their credit card divisions for even more cash flow to help underwrite the loss of mortgage fees and underwriting fees.”

Consequently, analysts have witnessed interest rates rising, credit limits falling and low teaser rates disappearing—decisions that may add durable stability but will squeeze strapped borrowers in the short term.

“This is affecting people across the board.” says Garcia. “As people feel the subprime crisis, credit card companies are putting additional strain [by raising their] credit card interest rates, which also will increase the amount of economic instability in households.”

Regulatory roadblocks

With the threat of a recession looming, grassroots pressure is building to protect borrowers from the credit card industry’s worst abuses. The most encouraging effort is the formation of Americans for Fairness in Lending AFFIL. Founded in August 2006, AFFIL is an umbrella organization that develops public messaging campaigns for its 18 consumer rights allies, which are free to focus on the nuts and bolts of lobbying and mobilizing. “Our role is to publicize and get out the message,” says Campen, “and hopefully that will lead people to get engaged.”

Some labor unions have stepped up, as well. The Service Employees International Union (SEIU), as part of an initiative targeting banking practices that damage the financial security of working people, is taking aim at Bank of America. According to the union, the bank is creeping up against the federal regulation that prohibits any single bank from controlling more than 10 percent of the country’s deposits.

To counter, SEIU released reform measures for holding Bank of America accountable to consumers. The union also collected reports of racial discrimination in lending, tax evasion and merger-related job cuts as leverage.

Even Congress, which to this point has largely overlooked the consumer debt crisis, is beginning to take action.

Headed by Sen. Carl Levin, (D-Mich.), the Permanent Subcommittee on Investigations had bank officials testify in April and December 2007 to investigate excessive fees and the arbitrary increases in consumers’ interest rates.

In January 2007, the Senate Banking Committee, chaired by Christopher Dodd (D-Conn.), challenged credit card executives to defend rising late fees and predatory marketing.

Two bills have been proposed: a Levin-sponsored Senate bill that would make it harder for creditors to charge hidden fees and bump rates without notice, and a House bill authored by Rep. Mark Udall (D-Colo.) that would amend the Consumer Credit Protection Act to enhance consumer disclosures and protect underage consumers.

Yet neither bill has gotten off the ground, and the prospects aren’t encouraging. Part of the reason is timing: addressing the mortgage mess has preoccupied lawmakers who monitor the financial services industry. The overrepresentation of moneyed interests on the Hill is important, too. The American Bankers Association recently commissioned Jonathan Orszag, co-founder of economics consulting firm Competition Policy Associates and a former economic adviser to President Clinton, to issue a report arguing that federal oversight would be counterproductive.

In the 2006 election cycle, credit companies—JPMorgan Chase, Bank of America, Citibank, Capital One and HSBC—made $7 million in congressional campaign contributions. And it doesn’t help that two leading Senate Democrats, Dodd and Hillary Clinton (D-N.Y.), represent large consumer-banking constituencies.

These roadblocks won’t keep angry borrowers and their advocates from fighting.

But until adequate regulations are put in place to safeguard consumers from their cards, and the need for borrowing is minimized by boosting earnings for working people, Americans will keep answering those mail solicitations.

“Why should anybody be allowed to put out unfair products,” asks AFFIL’s Campen, “which are simply designed to trap the unaware. In theory, we regulate toys, water, food, drugs, and we don’t want to have toxic products in any of those areas. We shouldn’t have toxic credit products either.”

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• Reader Comments

  The credit card companies suck, but in the same way as McDonald’s (really fast food in general). They give us what we want, then when we get fat (or broke) we blame it on them. Sure, they add lots of fat and salt (or interest and penalties), but it is us who shove the food down our gullets (or apply for more and more credit that we cannot afford).

  The best solution would be self discipline and taking responsibility for our own actions. But hey, we are all just victims, with no choice but to do what the tube tells us to do. So i guess it is not our fault we are fat, stupid and broke - the fault lies with “society”.

  I guess what we really need is big brother to keep us from making bad decisions. If we just give up our freedom then the state can take care of us all and our problems will all disappear! Yea socialism/communism!!!

  Posted by wolf on Jan 28, 2008 at 10:56 AM

  We, the public, can fight abusive credit card bank fees.  Household Bank, now HBSC, held my payment checks until overdue.  I caught them by sending payments “signature returned” and then stopped payments completely.  They wrote off the $4000 plus balance.  Providian charged an over limit fee resulting from their annual fee.  I objected, and they settled for 1/2 the balance $900 balance.  Later, I received a small check from the class action suit against this practice.  Bank of America turned me down for credit card processing because I’m an astrologer.  I stopped making payments on their credit card, with a $1500 balance..  Upon learning I’m a Vedic Astrologer, part of Hinduism, they stopped collection efforts on the card.

  Most recently, both Wells Fargo Financial and Wells Fargo Bank set credit card payment dates on holidays—an obvious attempt to gain extra late fees.  I objected and stopped making payments to both—balances of $2600 and $1000.  Wells Fargo will “eat” these balances, just as the other banks have.

  Posted by dmoon on Jan 28, 2008 at 4:20 PM

  I’m managing to beat them at their own game… so far. 

  I put all my purchases on one card, I balance the credit card just like a checking account; keep track of all debits, and send in a full payment each payday (bi-weekly for me) I have never been charged any interest on this account, and sometimes the statement shows a credit balance.

  I also transferred all my other outstanding balances to a card with a low interest “teaser” rate.  When the teaser rate expires, someone else offers me another one. (I’m down to owing less than $1000)

  I once lost the teaser rate because of a late payment. It was the old “four days to process an electronic payment” scam.  If the CC bill is due on the 15th, the bank deducts the funds from my account on the 11th. If I don’t have funds available, I get charged an overdraft. If I wait until after I get paid, I am late on the CC payment. No one at the bank can explain why it takes 4 days to make an electronic transfer.

  So, I have also put this card on a 2-week payment plan. I send them a check for half my monthly payment every payday.  I have been paying $150/month, I send the $75 every two weeks. Problem solved.

  I had a friend with the same problem, he couldn’t make a payment until after payday, which would have made him late. I told him to send the minimum payment immediately, then send the remainder after he gets paid.

  Of course, these tricks work only because they bill on a monthly cycle. Let’s hope the don’t figure it out for a little while longer.

  Posted by ohb0b on Jan 29, 2008 at 12:03 PM

  “Member since 1991” is on my card.

  We just got an overdue charge even though we always pay immediately — it comes in on one day goes out the next. Obviously they are playing games with us. I will give them a choice — either drop the penalty or drop our card. They will get NO penalty payment. So, sue me!

  Several years ago I had a similar experience when paying off a loan against my life insurance. When the IRS no longer permitted a deduction for the low interest loan, I sent a check for the total as soon as I got the next bill.

  For three months they kept sending a bill for the unpaid interim interest. Since they did not return my phone calls I sent them a notice: “You can forget about anymore coming from me. Go figure my life expectancy and work out your postage cost.”

  I got a zero balance in a short time.

  Posted by whattheheck on Jan 29, 2008 at 1:07 PM

  There are some hidden aspects. I had a credit company person explain to me (in an unguarded moment), their system of deciding whether you were a “transactor” or a regular payer. If you pay your bill right away, the company shortens your billing period by sending the bill out later, in relation to the “closing date.” If you are the sort that carries a balance, they lengthen your period. In the first case, they realize they aren’t going to make interest and other fees off of you, so they push to get the payment ASAP. In the second case, they figure you will charge more, pay later, rack up fees, and so on, if you are given a longer period to do it in. This ought to be just plain illegal, but not in today’s laissez faire regulatory climate.

  What we should also be looking at is that data mining is now a business of algorithms, etc. Remember that they are able to keep a perfect eye on your purchases, the timing and location of what you do, etc. All of this can help them form a better picture of how you can be milked as a cash cow. No law prevents them from analyzing all the data that you willingly give them by using the card.

  Posted by sailmariner on Jan 30, 2008 at 10:46 PM

• extended discussion >>>Continued...

  Discussions with more than 5 comments are continued on our special discussion page to encourage continuity and ease of use. There are currently 9 posts.

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