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Parade: Don't Get Clobbered By Credit Cards!
When a credit-card company claims you owe money, your legal rights are limited. At least 75% of cards have clauses that say disputes must be resolved in private arbitration forums, according to a recent survey. So when a disagreement arises, a consumer can’t take it to court—a serious issue if you’re a victim of identity theft or, like Troy T. Cornock of
Hillsborough
,
N.H.
, you simply don’t owe the money. Cornock was hit with a $9446.85 judgment for money he claimed was owed by his ex-wife, who had opened an account in his name. It’s only because the creditor went to court to enforce the arbiter’s award that Cornock—after five agonizing years—was able to get the ruling overturned. The banking industry defends mandatory arbitration as a fair and efficient way to handle disputes. However, a study by the consumer group Public Citizen of 34,000
California
cases found that consumers lost to companies in arbitration proceedings 96% to 99% of the time. So is there hope? The laws may soon be on your side. Until then, think twice before you whip out a card.
By Gary Weiss
Published: August 10, 2008
If you're like most Americans, you have four credit cards in your wallet—and you use them more than you should. Credit-card debt in the U.S. has reached a record high —nearly $1 trillion, according to the latest figures from the Federal Reserve Board. The average American household’s debt from credit cards has risen from $2966 in 1990 to $9840 in 2007.
The end isn’t in sight. As bank loans have become tougher to get, many Americans are using plastic instead of cash for basic living expenses, such as skyrocketing grocery costs and medical bills. And for too many of us, easy credit has led to easy spending beyond our means.
But the debt crisis inundating so many Americans today also is the result of an industry with few regulations and little oversight. Consumers nationwide are being burned by excessive fees, sky-high interest rates, and unfair, incomprehensible agreements that credit-card companies revise at will.
That may be about to change. In the face of rising consumer complaints and pleas for help, both the Federal Reserve and Congress have proposed new rules that have broad support. “We can’t wait to act,” says Rep. Carolyn Maloney (D., N.Y.), chair of the House Financial Institutions and Consumer Credit Subcommittee. “We need to stop abuses and tactics that are getting more and more Americans into debt.”
Even credit-card customers who play by the rules can be slammed with huge costs. Paying off your bills in full every month—as 60% of U.S. consumers always or usually do—doesn’t endear you to the credit-card companies. Once, lenders sought such customers. Today, credit-card companies call them “deadbeats,” because they make the least money off them.
The 40% of Americans who carry balances from month to month—known as “revolvers,” as in revolving credit—get socked the hardest. In 2007, credit-card issuers imposed $18.1 billion in penalty fees on revolvers—up more than 50% since 2003 and accounting for nearly half of the $40.7 billion in industry profits.
Rate increases can make it almost impossible to get out from debt. Take Millard Glasshof of Milwaukee, who stopped using his Chase card in 2001 but kept making regular monthly payments. By October 2006, his $6400 balance was down to $4800. Then, in February 2007, the interest rate on his card leaped from 17% to 27%. Though he continued to pay $119 every month, his balance didn’t go down a cent.
Fees and interest easily can exceed the amount you borrowed. Consider the case of a young sailor who opened a credit-card account at First Premier Bank in November 2006. By the end of January 2007, thanks to a pile-on of charges, he owed $379.45 on $84.85 worth of purchases.
If you’ve had trouble paying your bills in the past, you can expect an onslaught of new offers. Credit-card companies try to lure the young and financially unstable. During the first quarter of 2008, for example, 30% of credit-card mailings were specifically targeted to customers who already were steeped in debt, according to Andrew Davidson, vice president of Synovate Mail Monitor, a direct-mail tracking service.
The credit-card companies insist that consumers can choose to avoid most fees and penalties. “ There are over 6000 card issuers,” says Carol Kaplan, a spokeswoman for the American Bankers Association. “If you don’t like the fee structure of your credit card, there are 5999 other ones to choose from.” But consumer advocates point out that companies often add new fees and policies after customers already have signed up. They inform cardholders of these changes with impossible-to-understand notices in tiny print.
If you have credit cards, here are some practices to watch out for:
Your rates are raised without warning
You may have been paying your bill in a timely fashion, but if you fall behind in payments to another creditor or if your credit score drops for any reason, it can trigger a jump in the rates on all of your credit cards. Even more surprising: If you charge close to your limit without exceeding it, your rate can jump too.
Janet Hard of Freeland, Mich., was surprised to find that Discover had raised her interest rate from 18% to 24% in May 2006 even though she regularly paid her bill. “I was told that because of ‘other credit-related issues’ that had nothing to do with them, they had increased my interest rate,” says Hard. (A spokesperson for Discover said that Hard received advance notice of the increase, which she denies.)
Your due date changes
Don’t assume that your check must arrive at the same time every month. Some banks have been accused of abruptly switching payment due dates. Others may try to trip you up by specifying that your bill is due by a certain time of day on the due date. Many banks have narrowed payment periods from 31 days to 20 days.
Keep in mind that if even one payment is late, banks can raise your interest rate to as high as 28% as a penalty. Average late fees for large banks rose from $19 in 1995 to $35 in 2007.
Extra charges and penalties
Card companies tack on significant fees for all sorts of services: cash advances, balance transfers, conversion of foreign currency, paying off your balance by phone, and more. Going above your credit limit may trigger the biggest penalty of all, leading to rates of more than 30% a year.
Misleading introductory rates
Your mailbox is probably filled with offers of alluring low-interest credit cards—3%, 2%, 0%. These rates are usually just come-ons, and they may jump to as high as 30%. And it gets even worse. If you transfer a balance to a card with a 0% promotional rate, you may soon learn that the 0% rate applies only to the balance you transferred, while all future purchases accumulate at a much higher rate. And when you make payments, they’re applied to the debt with the lower interest—so the higher- interest debt keeps building.
Mandatory arbitration
When a credit-card company claims you owe money, your legal rights are limited. At least 75% of cards have clauses that say disputes must be resolved in private arbitration forums, according to a recent survey. So when a disagreement arises, a consumer can’t take it to court—a serious issue if you’re a victim of identity theft or, like Troy T. Cornock of Hillsborough, N.H., you simply don’t owe the money.
Cornock was hit with a $9446.85 judgment for money he claimed was owed by his ex-wife, who had opened an account in his name. It’s only because the creditor went to court to enforce the arbiter’s award that Cornock—after five agonizing years—was able to get the ruling overturned.
The banking industry defends mandatory arbitration as a fair and efficient way to handle disputes. However, a study by the consumer group Public Citizen of 34,000 California cases found that consumers lost to companies in arbitration proceedings 96% to 99% of the time.
So is there hope? The laws may soon be on your side. Until then, think twice before you whip out a card.
____________________________________________________________________
Be Smart About Your Credit Cards
►Make sure you're aware of changes in rates and rules.
►Pay your balance monthly - even if it means taking out a personal loan.
►Apply for a card with a credit union, which is less likely to impose burdensome fees.
►Don't use credit cards when traveling abroad - conversion fees are steep. Use an ATM to access your bank account.
____________________________________________________________________
CONGRESS TAKES ACTION
Several bills now making their way through Congress are aimed at curbing some of the worst practices of credit-card companies. Rep. Carolyn Maloney has more than 150 co-sponsors on legislation establishing a Credit Cardholders Bill of Rights that would outlaw unfair and deceptive card practices. Among its provisions: ample notice before rate hikes and a payment period of no less than 25 days. Sen. Chris Dodd (D., Conn.) has introduced similar legislation in the Senate. His bill also prohibits charges for paying by mail, phone, or online and restricts marketing credit cards to those under 21. Both Maloney and Dodd hope to bring their measures to a vote before Congress adjourns in September. A proposed Arbitration Fairness Act by Sen. Russell Feingold (D., Wis.) would restrict mandatory arbitration.
Meanwhile, the Federal Reserve Board is proposing tougher rules to protect consumers. As they have in the past, banking industry lobbyists are expected to fight, but Maloney believes the bills stand a good chance because of increasing consumer complaints and the uncertain economy. Notes Senator Dodd: “People are angry enough about the issue that they won’t tolerate someone in Congress siding with the industry.”
http://www.parade.com/hot-topics/0808/dont-get-clobbered-by-credit-cards
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