Considering how the economy is going gang-busters,
it's ironic how many credit card holders are simply going
bust. Despite general prosperity, a growing number of
consumers are being financially squeezed by what many contend
to be the blatantly unfair and misleading practices of the
$1.2 trillion credit card industry.
Industry observers share this concern, and argue that
credit card practices represent a staggering range of abuses
and excesses, many of which would be unthinkable in other
industries. "Today's credit card offers are like a mine
field," says Robert McKinley, a noted analyst and CEO of
Cardweb.com, a company that tracks the credit industry for
both consumers and the industry itself. "If you pay attention
you can get a great deal, but make one mistake and you'll get
your legs blown off."
- After First USA, the nation's second-largest card issuer
and the bank behind the popular Mileage Plus card, failed to
mail out October 1999 bills due to an internal glitch,
customers were hit with $29 late charges for not paying on
time. Regular monthly bills are a mere "courtesy," the bank
said, and not getting one is no excuse not to make a
- Meanwhile, over at Capital One, mail and check
processing goes on 24 hours a day, yet the bank has long
considered any payment posted after 9 a.m. on the due date
to be late.
- Card issuer Advanta, faced with a consumer revolt over
the company's having raised supposedly fixed introductory
interest rates, blithely announced that anyone canceling
their card would be assessed a $25 fee.
- Most banks consider a large credit balance grounds for
raising a customer's interest rate, while several penalize
cardmembers who don't use their card often enough.
- Just about all banks lure consumers with attractive
single-digit interest rates, sometimes as low as zero
percent; but once the customer is onboard, most invoke
complex, vague fine-print provisions to raise those rates to
loan-shark heights as high as 30 percent.
Overall, credit card issuers have been able to execute an
aggressive profit-making strategy that critics say stays
essentially within the confines of the law but badly exploits
consumers. "Credit card solicitations are designed to sell,
not to educate," says Sen. Charles Schumer, D-NY, a member of
the Senate Banking Committee and leading advocate of reform.
"With something as important as credit cards and financial
management, solicitations should clearly show rates consumers
will pay, and they should not be as misleading as sweepstakes
Consumers, critics charge, are wooed through heavy
promotions, permitted and even encouraged go into debt, then
penalized for doing so, run through a gauntlet of punitive
fees and usurious interest rates, and treated like criminals
when they have trouble meeting the financial demands. Despite
mounting complaints in recent years, bills by congressional
reformers have been repeatedly stymied by the powerful banking
industry, for whom credit card business is a huge component.
Total national credit card debt is projected to have reached
$590 billion last year, up from just $220 billion in 1990.
Credit Card Crunch
When Robert Darling, 70, a retired radiology technician
from Clovis, California, paid his Capital One card late by one
day, the bank jumped his interest rate from 7 to 21 percent.
When Darling underwent open-heart surgery and fell behind in
his payments to Discover, the company's interest rates began
climbing in spurts -- from 7 percent to 12, 14, and 16
percent, finally settling in at a jaw-dropping 26 percent.
When Darling explained that he had had surgery, not one of his
numerous creditor banks showed the slightest compassion.
"Unfortunately, penalty pricing is a goldmine for credit
card companies, and perfectly legal," says Rep. John LaFalce,
ranking Democrat on the House Banking Committee. And yet, when
LaFalce and some colleagues introduced corrective legislation,
they got exactly nowhere. "The Republicans would not even give
us a hearing on this bill in the last congress," says Rep.
Robert Menendez of New Jersey.
That's no surprise. The banking industry put more than $11
million into GOP congressional candidates and party committees
during the last election cycle, according to the Center for
Responsive Politics, and more than $5 million to Democrats. As
a result, the credit card industry is almost completely
unregulated. It's little better at the state level. Many
states don't cap interest rates, and even those that do, like
New York and Arkansas, can't stop banks that solicit their
residents from locating their credit card operations in states
such as South Dakota and Delaware, where pretty much anything
Incredibly, congress last year not only failed to offer
consumers any relief, it moved to penalize them further. The
so-called "bankruptcy reform act of 1999," passed by the
House, actually strengthens the banks' hand, making it more
difficult for consumers to include credit card debt in
The industry insists that it's a two-way street, and that
the system can work well for informed consumers. "With credit
comes responsibility," says Janet Eissenstat, spokeswoman for
the American Bankers Association. "Credit is a very powerful
tool, but as with any tool, you've got to read the
instructions carefully." Calls seeking comment from Citibank
and Capital One, which are among the largest individual credit
card issuers, were not returned -- the exact formulas for
establishing high, "penalty pricing" on interest rates are
considered proprietary. Discover spokesperson Cathy Edwards
says that the company is willing to work with individual
cardmembers on their problems. "We do make exceptions," she
Profiting from Confusion
The industry certainly hasn't suffered from the consumer
confusion. In 1998, pretax credit card industry profits were
$11.4 billion, way up from $6.4 billion in 1990. Competition,
however, has increasingly cut into margins. So companies have
decided to go for volume. This has resulted in a deluge of
solicitations and ever more clever marketing arrangements,
including co-branding and incentive cards.
As the economy sails merrily along, credit card
debt continues, paradoxically, to grow. The average American
who carries a credit card balance owes about $7,500, up from
$3,100 in 1990. Typical is Gregory Land, 43, a truck driver
from Poplar Grove, Illinois. As his income went up, so did the
number of credit card offers. "It was an endless river of
credit," he says. Using cards, he bought school clothing for
his three growing children, as well as furniture and
carpeting. Land, who considers himself a responsible citizen,
took one company up on its suggestion that he pay for a
vacation with its card - and took his family to Disneyworld.
The result? After five years, Land had $30,000 in credit card
debt ,and is now working with a credit counseling agency to
pay it off.
Consumers have grown tired of the tons of direct mail, and
so companies have devised increasingly tricky methods of
getting them to open the envelopes. Capital One sends out
envelopes that look an awful lot like IRS notifications. They
have also disguised the identity of the card issuer, in part
to attract customers who may already be mad at the company,
and in part to lure consumers to increase their credit lines
by offering new cards with enticing introductory pricing.
"Credit card issuers continue to dangle lots of carrots in
front of consumers but what you see is not what you may get,"
says McKinley. Several top issuers promote single digit
interest rates with no annual fee and credit limits as high as
$100,000. But, in reality, people with an annual income of
$30,000 and reasonably good credit will rarely qualify for an
interest rate of 10% and can expect no more than a $6,000
credit limit. If they apply for the no-fee, single digit
interest card, they will most likely be bumped up
automatically to the card issuer's primary interest rate range
of 15% to 18%. Issuers whose cards offer extremely low
introductory rates usually approve less than 5 percent of all
applicants, according to McKinley.
Banks invoke all kinds of reasons for raising interest
rates. The most noxious and hard-to-predict are increases
based on a complex calculation of your overall financial
situation, taking into account how much overall credit you
have, and how much of it has been used up. So, for example,
someone who has four credit cards with a total credit limit of
$20,000 might be penalized when his outstanding balances reach
more than two-thirds of the limit -- even if his payment
history is perfect.
And banks reserve the right to levy all kinds of fees and
rate changes, all in the fine print, of course. "The print was
so fine, if you don't have a magnifying glass, you can't read
it," says Darling. And once established, fees have a way of
growing exponentially. Fees on a cash advance of $1,000 have
tripled from an average of $10 three years ago to $30 today.
Late fees are up from $7 a few years ago to $29 today.
Who Suffers Most?
Not everybody is easily victimized. Those with abundant
financial resources usually have the cash flow to pay off and
cancel any credit card when fees or interest rates become
onerous. It's the financially vulnerable and youngest
consumers who suffer the most. Those on limited incomes get
caught in a pincers movement: once rates escalate, they have
no means to pay off the cards and move on. The high rates,
combined with low required minimum monthly payments, mean that
some people will be paying off debts for years. "There are a
lot of folks on a treadmill," says Gary Klein, a consumer
credit specialist with the Boston-based National Consumer Law
Center, which publishes Surviving Debt: A Guide for
Consumers. "Payments never seem to bring down the
College students are also among the victims, eager to spend
but not cognizant of the implications of the fine print.
Credit card companies love students because they spend
extravagantly while mom and dad guarantee that the bill will
be paid (about 70 percent of college students now have cards,
and one-fifth of those carrying balances owe more than
$10,000). Abuses, though, have grown so commonplace that some
universities have banned card solicitations on campus. The
feverish competition has expanded to high schools, where web
mavens are urged to get the Cybermoola card, a prepaid virtual
credit card strictly for Internet purchases. And last year,
First USA, in a ludicrous incident underlining the bank's
hunger for new cardholders, issued a card to a toddler, even
though the mother wrote in response, "Thanks for the great
offer but I'm only three."
The economics of the credit card business is replete with
irony. Although credit card companies consider less-affluent
customers their greatest risks, they are also the most
profitable -- provided they do not default -- because they
lack the means to pay off and cancel a card when the terms
become oppressive. So banks play a complicated game of trying
to extract maximum income from consumers without pushing them
to the point of no return. When consumers find themselves
seeking the help of credit counseling agencies, which are
industry-financed middlemen who consolidate bills and
negotiate lower rates, they end up paying interest rates
similar to what consumers with better credit might have been
paying in the first place.
Despite all the hype in ads for credit cards, issuers do
less for their customers than almost any other industry. A
credit card balance is merely a loan, with monthly billing.
The actual transactions with merchants are handled for the
banks by associations like VISA and Mastercard. As for the
touted perks, consumers complain that although some -- like
Gold Cards that cover basic insurance on auto rentals - are
handy, others turn out to be extremely disappointing. Airline
miles, for example, are worth mere pennies, and often prove
uneconomical when coupled with high fees and interest rates.
Gregory Land got a Ford Visa/Driver's Ed credit card because
of a promised rebate on Ford cars, then concluded that the
$250 price reduction was an insignificant savings in
comparison to the whopping fees and late charges he ended up
paying over the years.
Consumer outrage, if not at WTO/Seattle-level, is growing.
And consumers are turning to an increasingly reliable
advocate, the class action attorney. Lawsuits over late fee
practices, overlimit and foreign currency transaction fees are
currently pending against First USA (owned by Chicago-based
Bank One), Chase Manhattan, Citibank, and Providian, among
others. (The industry as a whole took in $18.9 billion in
assorted fees in 1998) "Class action is the best way to deal
with this," says consumer advocate Ralph Nader.
"We've had so much deregulation, I think most observers
think its time to consider re-regulation," says Klein, noting
how difficult that will be to pull off without significant
campaign finance reform. Still, taming the banks seems a
terrific, nonpartisan, populist political issue, waiting for
the right savvy politician to jump on it. Even some banks
tacitly acknowledge the unfairness of their credit practices.
Referring to its practice of effectively levying late fees on
people who haven't paid late, Tom Kelly, a vice president at
Bank One, parent company of First USA, says: "We shifted to a
due-date-plus-one day system. It will reduce late fees but
will improve customer satisfaction." In other words, now your
interest rates can't quadruple unless your payment actually
arrives the day after it's due.
San Francisco-based Providian, which has a reputation as
perhaps the baddest of the bad boys, and has been under
pressure from both a district attorney's probe and consumer
lawsuits, recently brought in a top PR firm, and has in the
last few months sought publicity for being a good corporate
citizen -- providing new jobs, helping the homeless -- deeds
which have little to do with the operating practices that
angered the public in the first place. But the company clearly
got the message. "Complaints about late fees have dropped 90
percent, because we have a policy of reversing any fee that a
customer feels was wrongly charged," says Laurie Cole, vice
president at Providian.
But such squeaky-wheel-greasing doesn't address the broad
systemic problem, say critics. So Rep. LaFalce plans to try
taming the beast again in the upcoming session. His bill
package, the Consumer Credit Card Protection Amendments,
would, among other things, require full disclosure of all late
fees and penalties, minimum monthly payments, teaser-rate
expiration dates and the rates that follow. It would prevent
banks from issuing credit cards to those under 21 without
parental consent or evidence of independent means. And,
perhaps most significantly, it offers consumers an out: it
would allow cardholders whose rates get hijacked to cancel
their card on the spot and pay off the balance at the old