Consumer Reports (November 2005)Ruth Owens’ troubles began when she stopped using her Discover card. The Cleveland woman, who was on Social Security disability, had just passed her $1,900 balance limit.
Over the next six years, she made $3,492 in payments but never reduced her debt. Discover charged fees and finance charges that used up all her payments and ballooned her balance to $5,564. In 2003, the card company sued Owens, asserting that she breached the card contract by failing to make minimum monthly payments. “After paying my monthly utilities there is no money left,” Owens pleaded in court papers. “If my situation was different, I would pay." Cleveland municipal court judge Robert Triozzi ruled that Owens had paid enough, declaring that she had been prey to “the plaintiff’s unreasonable, unconscionable, and unjust business practices.”
Getting trapped in the jaws of credit-card debt has become alarmingly easy. Thanks to cozy relationships that have developed over the years among lawmakers, federal regulators, and credit-card issuers, few consumer protections are left. There have been no limits on interest rates for years, so a temptingly low 1.9 percent APR can morph into double-digit territory at the whim of the credit-card company. Or it can climb beyond 30 percent when a consumer does nothing worse than sign up for a new card, inquire about a car loan, or make a single late payment to
any creditor.
As for fees, anything goes. You can receive a $39 spanking for going over the limit, paying late, or paying less than the minimum, for balance transfers and cash advances, and foreign currency transactions. Credit cards have turned into “nothing less than wallet-sized predatory loans,” observed Sen. Christopher Dodd, D-Conn., during a congressional hearing earlier this year.
The effects on Americans’ finances are showing. Average card debt per household with at least one credit card topped $9,300 in 2004. That’s more than triple the average in 1990. Consumer bankruptcies have skyrocketed from 287,463 in 1980, the dawn of card-industry deregulation, to just over 1.5 million in 2004. Credit-card fees and finance charges are much more difficult to repay for families with other money problems, say medical bills or a job loss. “It is the rising cost of the plastic itself that is tipping hundreds of thousands of families over the edge,” says Elizabeth Warren, a Harvard law professor and bankruptcy expert.
Nessa Feddis, senior federal counsel at the American Bankers Association, is not totally sympathetic. “It isn’t just medical expenses that can cause the trouble,” she says. “It’s that nice handbag they charged, that kind of spending.” Penalty fees are needed, she adds, as “deterrents to bad behavior.”
In 2003 those deterrents, along with fees for cash advances, exceeded the after-tax profits of the entire credit-card industry just two years earlier. Card issuers have been experiencing record profits since 2000 and saw them top $30 billion in 2004. A wave of mergers has ensued, consolidating power in the hands of a few players who set take-it or leave-it terms for consumers. Prior to 1978 the top 50 issuers represented 50 percent of the credit-card market, but by mid-2005 only five companies, American Express, Bank of America, Citigroup, JPMorgan Chase, and MBNA, controlled 65 percent of the market. “The impending marriage of MBNA and Bank of America will further narrow the circle of big players; consumers can expect to be squeezed even harder by rising rates and fees,” warns Robert D. Manning, professor of finance at Rochester Institute of Technology and author of “Credit Card Nation.”
Don’t think you are off the hook if you are among the 45 percent of cardholders who pay balances in full each month. As interest rates rise, card issuers are seeking ways to eke out income from you as well. “You may have to pay fees to receive what used to be free year-end summary statements,” Manning says. “You may be switched to penalty interest rates on cards if you don’t use them frequently, and in general you’re likely to see a steady decline in the value of reward programs, such as cards that offer frequent-flyer miles or cash rebates as perks.” See our November 2005 report Mileage-award credit cards (available to ConsumerReports
subscribers).
Warren adds, “This is not a case of a few piranhas swimming amidst a sea of big benign fish. The deregulation of this industry has made the waters treacherous for all consumers.” This report details the most significant dangers, along with advice on how to minimize them.
