The most recent move by the Obama Administration against the predatory and abusive practices of the credit card issuers does not seem to have changed their behavior, despite the fact that two of them, Bank of America and Citi, have received abundant and cheap funds from the authorities. This makes those banks' most recent actions even more shocking and unacceptable.
Credit cards happen to be the only form of credit available to most consumers. They are an essential part of their financial stability. They are therefore a key to the economic recovery and the amounts available as well as the interest rates they charge have become a burning issue for most households.
Three aspects of their recent bad behavior need to be addressed:
1. Credit Limits: In September, Bank of America launched two rounds of reductions of the credit lines on credit cards. I found this outrageous and went to the Comptroller of the Currency, the regulator of the banks regarding the matter. They sent the file to the Bank of America, whose justification was hilarious: "We consider that you have sufficient available credit"...and the second time "because you currently owe sufficient amounts on your revolving lines of credit with other creditors". Does that mean that Bank of America has the necessary information to pass that judgment for each of its millions of card holders? Can credit card issuers unilaterally continue to reduce their exposure on a whim? Isn't the consumer entitled to use credit lines he or she has been granted? If the credit limit is too high, shouldn't the bank bear some responsibility for issuing it to begin with?
2. Interest rates: This week, I received a standard letter from Citi. Rather than applying the outrageous 19.99% standard rate, they indicate that the rate is now increased to 29.99%. However, if the cardholder makes every payment on time, that rate will be reduced by 10% (back to 19.99%). They clearly state that if a single payment is late, the cardholder will lose the 10% "discount". Is that what the new legislation was aiming for? Could one payment made one day late prompt a 10% increase of interest rate without notice? 19.99% is now a "discounted" rate?
3. The system is corrupt: The "ghosts" in the system are the underwriters who have become lazy and inefficient. Late credit card payments are sufficient to make the consumer effectively ineligible for any other form of financing, including mortgages, car financing or home equity loans. By lowering credit lines and raising interest rates, the credit card issuers have put consumers in a hopeless situation.
The real consequence of these behaviors is that they kill consumer confidence better than any decrease in the Dow Jones. The banks have returned to their same old practices. What is even worse is that there is no escape. Even if one repays the entire outstanding credit card balance in one shot, you will not qualify for lower rates for at least a year.
This week I also received in my letter box an offer from the same Bank of America inviting me to borrow at 4%; the same bank makes the same offer to you through ubiquitous TV ads. The credit card issuing banks have gone back to their predatory tricks and usurious rates. They lure consumers in with low teaser rates and instantly start looking for excuses to raise them to 29.99%.
This behavior demonstrates that the banks' refusal to act responsibly is endless and that they certainly have not learned their lesson. We need a consumer finance agency to protect credit card holders from these abuses. The banks will complain that they are losing hundreds of millions of dollars on credit card loans. However, it is their own fault. Their irresponsible underwriting and predatory practices led to those losses. They continue to mislead the consumer who believes that if he gets a credit line, he can count on it at decent terms. It's no accident that the banks domicile their credit card operations in South Dakota, where they have no laws against usury. It isn't just bonuses that are back in force but the same fundamental lack of ethical behavior on all fronts.
My best advice: if you can afford it, use only your debit card. Once again, don't count on an umbrella from a bank when it rains -- only when the sun is shining.