Banks and credit cards

If you live in America, you have also probably seen the various Capital One credit card commercials ("what's in your wallet?"). Or even the MasterCard "priceless" advertisements.

If you are college aged, you have probably been deluged with applications for various credit cards.

When a person applies for a credit card, that person signs a contract that states he will be paying a certain level of interest on his purchases made with the credit card. The credit card companies then have all manner of penalties that will actually raise that level of interest and often that is where people get themselves in trouble.

How lucrative is the penalty business?

...the amount of money generated by penalty fees like late charges and exceeding credit limits had increased by about $1 billion annually in recent years, and should top $20 billion this year.

While that might not seem fair or right, it is legal. And the credit card companies have been doing it for years.

"Virtually no other contract in this country allows a business to change the terms of an agreement once a purchase has been made," says Travis Plunkett of the Consumer Federation of America. "That's the main issue."

Back in 2004, Edmund Mierzwinski of the U.S. Public Interest Research Group was interviewed for PBS Frontline.

Congress has been afraid to deal with any kind of bad credit card company practices for years. Three years ago, they held a hearing on credit card practices, but they did nothing. Since then, Congress hasn't done anything about credit card companies' unfair practices because the credit card companies have enormous power and sway with the Congress. There are lobbyists for each of the big credit card companies. Then there are lobbyists for the bank associations. And the bank associations and the credit card companies have political action committees. They made soft money donations when they were legal, and they also have a large lobbying budget. Credit card companies have power over the entire Congress. Absolutely. The banking committees are usually dominated by members from the states where the credit card companies and the other banks do business.

So essentially the Congress and the courts took away the right of the states to do anything about the credit card industry years ago. We've got the credit card companies saying Congress shouldn't do anything, and they inoculate themselves against that with a massive lobbying push...

...It's partly that some bad laws are being passed, but it's more with this particular industry, credit cards, they have managed to prevent Congress from investigating and conducting the oversight that Congress is supposed to do of their practices. … The courts and the regulators have taken away the right of the states to investigate or regulate the credit card companies, but Congress has fallen down on the job. So first, Congress is doing nothing about the problems in the credit card industry.

Second, the credit card industry wants new laws, such as the bankruptcy law, the outrageous, unfair bankruptcy law, and they've come very close to enacting it. They have bipartisan support. [It] would be shocking to the public to realize how many members of Congress backed the credit card industry's attempt to put Americans in debtors' prison without regulating the unfair practices of the credit card industry at the same time, even if you agreed that we needed to change the bankruptcy laws, which most people don't...

As Mierzwinski notes, not only does the credit card lobby spend millions to control Congress...they also write the bills that affect them.

Remember when George W. Bush signed the new bankruptcy overhaul legislation? Yeah...the banks and credit card companies wrote that one.

Sponsors of the bill acknowledge that lawyers and lobbyists for the banks and credit card companies were involved in drafting it. The bill gives those industries most of what they have wanted since they began lobbying in earnest in the late 1990's, when the number of personal bankruptcies rose to record levels.

Finally, now Congress is working on credit card reform to try and curb certain abuses and make the playing field a little more even. Some of the features may finally change the situation that Mierzwinski was talking about.

A card company can still change the terms of your contract. It just has to give you 45 days notice. It's still possible for an issuer to assess a charge when you go over your credit limit. But you'll have to have indicated that you want to be able to go over your credit limit in the first place, instead of having your card denied. Companies can still set minimum required payments however they see fit. But they'll be required to tell you how long it would take to pay off your balance if you stick to that minimum amount each month.

Some of the other features include:

Banks must send out your bill no later than 21 days before the due date. They cannot send it with, say, 14 days to go, hoping that you won’t get a check to the bank in time to avoid a late fee...

...If the card company gets your payment by 5 p.m. on the due date, it’s on time, according to the new rules. No more of this early morning deadline nonsense, which led to late fees for payments that arrived with the afternoon mail. Also, no more late fees if the due date is a Sunday or holiday and your payment doesn’t arrive until a day later...

...Let’s say you’re paying different interest rates on the debt on a single card — one for a cash advance, another for a balance transfer and a third for new purchases. Now, when you make a payment over the minimum balance, banks will have to apply it to the highest-interest debt first. I bet you can guess how some banks used to handle this sort of situation.

Will that stop banks from making money hand over fist every year? Probably not. And they certainly aren't happy to see that potential $20 billion a year in penalties disappear...so they are going after a new target: the good customers.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

If you have less than impressive credit, the credit card companies will make piles of money off you. That has always been the situation. But now if you have absolutely perfect credit....the credit card companies will make piles of money off you, too. Annual fees, immediate interest, loss of reward programs, etc.

When Glenn Back decided to mangle Pastor Martin Niemöller's famous "first they came..." quote and turned it into some offensively idiotic method of fomenting hate and fear he stated:

First, they came for the banks. I wasn't a banker. I didn't really care. I didn't stand up and say anything.

No, Glenn. It's not that we didn't care because we aren't bankers. It is because they have been screwing us for years and are even now looking at methods to screw over those who have perfect credit. That's the reason we "didn't say anything".