Credit Cards
Credit cards represent one of the most common forms of lending: U.S. consumers charged more than $1.8 trillion to over 691 million credit cards in 2005.
More Americans have access to credit than ever before, yet this widespread access has also come at a great cost. While credit cards offer a convenient form of payment for many consumers, low- and middle-income households may increasingly rely upon them to manage the costs of basic necessities like medical expenses and car repairs.
Furthermore, a multitude of abusive industry practices make it more likely that a family will fall into persistent and burdensome debt, with little chance of paying or keeping down their debt.
What are credit card abuses?
- Interest Rate Hikes for Late Payments: Major credit card issuers raise a cardholder’s interest rate when their payment is late, even if only by a matter of days or, in some cases, even hours. These "penalty" or "default" interest rates can top 30%. About eleven percent of credit cardholders pay interest rates of more than 25%.
- Fees: Credit card companies make a lot of money by charging fees. In 2004, revenue generated from all fees was $24 billion. Fees are charged for all kinds of reasons - there are late payment fees, over-the-limit fees, cash advance fees, balance transfer fees, foreign exchange fees, telephone payment fees, and sometimes even fees for buying lottery tickets with your card! In 2005, the average late fee was $37, and the average over limit fee was $34.
- Universal Default: Credit card issuers routinely check their cardholders’ credit reports and will raise the interest rate on the card if there has been a change in the consumer’s credit score, or if the consumer is behind on payments to another lender. Credit score changes can result from activity on another credit card or the addition of new loans. These changes can trigger an interest rate change on a consumer’s credit card even if nothing regarding that credit card has changed.
- Binding Mandatory Arbitration Clauses: The fine print on many, if not most or all credit card agreements, says that in the event of a dispute the borrower must use the lender’s “arbiter” to settle the dispute. This clause waives the consumer’s right to a court date with an unbiased judge or jury.
- Retroactive Application of Interest Rate Increases: When credit card companies raise a cardholder’s interest rate, the new rate may be applied to the entire existing balance, rather than just to new purchases. As a result, a cardholder can make a purchase with the understanding that they would repay the amount under the existing terms of the credit card agreement, yet have their interest rate retroactively changed due to a change in their credit score.
- Double-Cycle Billing: Double-cycle billing is a way of calculating interest on credit cards that can, in effect, eliminate the grace period for consumers who pay their balance in full in one month, but not the next. Double-cycle interest is assessed only in the month in which a customer moves from a non-revolving to a revolving state. For example, a consumer without a previous balance who has a 10% APR on purchases makes a purchase of $1,000 on May 1 (the first day of the consumer's May cycle). The consumer then receives a bill for $1,000 on June 1. Instead of paying the entire balance, the consumer sends the credit card bank a minimum payment of $20, which arrives on June 30. When the customer's account cycles on the night of June 30, the bank will assess finance charges for the month of June and reach back and add finance charges for the entire month of May. The interest computation returns to a single-cycle method for the remaining months in the revolving period.
- Payment Allocation Methods: Some card issuers assess different interest rates to different balances on a single account. Many of these issuers first allocate cardholder payments to the balance with the lowest interest rate, which means that the portion with the higher interest rate will not be paid down until the balance with the lower interest rate is paid off in full.
What can you do if you have a credit card problem?
AFFIL cannot guarantee that help is on the way, but these are our best suggestions.
- Call your Lender: If your interest rate has gone up or if your credit card issuer has applied a penalty fee to your account, call your credit card company and ask them to lower your rate or remove the penalty. Studies have found that some card issuers will lower the rate rather than lose you as a customer.
- If there is a mistake on your credit card bill and you are being billed for a charge you did not make, tell your lender right away. If they do not take action, you can send them this sample dispute letter provided by NEDAP, an AFFIL Partner. You have rights under federal law to dispute your bill. These rights should be described on your monthly statement.
- File a complaint: If you experience difficulties and they are not resolved, you should file a complaint with the Office of the Comptroller of the Currency, which regulates most credit cards.
- Contact your federal legislator: You may write to your U.S. Congressperson or Senator. It is important that they know your story so they can decide whether changes in the federal laws need to be changed. Click here to find your federal legislators.
- Find a lawyer: AFFIL is not a lawyer referral service and cannot refer you to a specific lawyer. If you want to talk with a lawyer who might help you with your debt problems, you can review the list of members of the National Association of Consumer Advocates (NACA) in your area by clicking here. You can also contact your state bar association’s lawyer referral service.
What do we know about the credit card industry?
Credit cards represent one of the most common forms of lending: U.S. consumers charged more than $1.8 trillion to over 691 million credit cards in 2005.
In a deregulated lending environment, credit card companies can construct the terms, rules, and practices of the credit card agreement without meaningful regulation. Prior to 1978, 37 states had usury laws that capped interest rates and fees on credit cards for consumers in their states, most at less than 18 percent APR. After a set of Supreme Court rulings held that national banks could charge credit card customers the highest interest rate and fees allowed in the bank’s home state, as opposed to the customer’s, major banks quickly moved to states like South Dakota and Delaware, where there were no usury ceilings on rates. Today, the credit card market is dominated by national issuers, which can export their rates to consumers in other states, making the few remaining state usury laws irrelevant.
The credit card industry employs complex pricing structures, resulting in a maze of interest rates and fees that are difficult even for highly educated consumers to understand.
How much do credit cards costs consumers nationally?
The credit card industry is grossly profitable, and highly costly to many consumers. In 2004, the revenue generated from all fees alone was $24 billion.
