Exorbitant Credit Card Rates Causing Millions of Bankruptcies
As someone who previously has been employed in marketing of the credit card industry, I know first hand that banks make most of their money from credit cards.
However, a little education is necessary to understand the industry from a banking perspective.
First of all, banks rate people who pay off their credit cards lower than those who extend their payments. People who pay off their credit cards each month don’t pay enough interest for banks to consider the account profitable. Thus, when banks consider applicants, one of the main things seriously consider is the applicant’s payment history, i.e. paying credit card debt in full each month.
Banks don’t like people who refuse to carry debt because they don’t make any money in interest. At any time but most particularly in troubled economic times like these, banks rake in money. Why? Credit cards are the biggest money-maker that banks have. Therefore, banks aggressively go after people who have a financial history of not paying off their credit cards each month.
For example, in the early 1980s, Bank of America nearly went bankrupt as a result of its’ being over-leveraged in real estate when a real estate decline set in. What saved Bank of America was its’ large number of credit card users – and the interest and fees that flowed into the bank.
Billions flow into banks each year from fees and interest rates on credit cards. Far more than from any other banking product. Hundreds of so-called banks incorporated during the last twenty years specifically to service the credit card industry. Their only raison d’etre was to get in on the huge credit card market…and the high rates of return in terms of interest rates and fees that credit cards provided.
During the Bush Administration, banks successfully lobbied the Administration and the Republican Congress into relaxing the rules on credit cards. In addition to being able to increase fees and add other fees at their discretion, credit card providers gained the right to effect – change – fees, interest rates and APR timetables at will.
Basically prior to the 1970s, banks were held to a “usury” standard. Banks could only charge a few percentage points above prime for any loan. However, when VISA and MasterCard came into being, those usury rates flew out the window because suddenly loans were being made on a revolving, ever-changing amount basis rather than on a static, secured basis. Over the course of thirty years, banks saw their balance sheets grow dramatically black as their credit card profits rose.
Banks realized that customers who revolved their balances from one month onto the next paid greater amounts of interest, thus bank increased profits. Those who responsibly paid off their balances each month were penalized in bank ratings, and those who paid gradually were rewarded in bank ratings.
With the changes instigated and lobbied by banks during the Bush Administration, banks dramatically increased their profits by legally being able to accelerate their interest rates and fees at their discretion, giving little or no notice to their customers…and official government oversight failed at every step of the way, from Congressional to Administration oversight. Although Congressional hearings were held regarding the consumer-punitive practices of the credit card industry, nothing changed as a result of the “free market” Republican Congress.
As a result, banks continued to and became even more arrogant. They thought they could charge whatever they wanted, whenever they wanted, without regard to the consumer. To this day, as banks see their huge investments in real estate lose money, they rely upon their credit card customers to keep them afloat. But to be able to balance the books in response to the current financial crisis and, therefore, look profitable, banks have chosen to increase interest rates and fees to levels that, unfortunately, has forced millions of Americans into or near bankruptcy.
After being seduced with the luxury of buying on time, millions of Americans are now being hit with interest rates and additional fees they simply cannot afford- or have the ability to pay – in order for banks to balance their income statements.
A few months ago, the Democratically controlled Congress pushed through regulation changes in the credit card industry that provide some benefits and relief to the consumer as opposed to the previous Bush-Republican free market legislation favoring the credit card industry. In the new legislation, Congress mandates greater consumer benefits regarding fees and interest rates.
However, that legislation does not take effect until July 2011. By then millions of credit card holders will have paid interest rates of 20 to 30% – or considerably more (in some cases up to nearly 50%) – on their accounts and seen the amount and number of fees increase dramatically as banks attempt to stabilize their balance sheets on the “backs” of credit card holders. Worse, millions of Americans will have been forced into bankruptcy as a result of usurious penalties and practices.
While I fully understand the need of banks to show a profit, especially when the financial markets are experiencing a dramatic nose-dive in their per-share prices and all the banks are mortally afraid of looking financially weak, it is not their long-term growth potential, i.e. customer interest, to push their customers into bankruptcy in which they lose everything or by having created such a high level of animosity as to drive their customers away.
If the people managing banks don’t learn the lesson of Bank of America in the 1970s, they will find themselves with far fewer customers as did Bank of America – and in a much more stringent, regulated atmosphere.
Meanwhile, American voters have a chance to push Congress towards a sooner change in the effective new regulation dates and to demand “usury” laws be put back into banking. Banks won’t like either change, but they will force banks to become far more responsible and consumer oriented.