A Possible Change in Credit Card Industry

03:05:29 AM Thursday, August 02, 2007

Unfair credit card deals keep low income families burdened with debts

Have you ever questioned yourself: "How can all those credit card companies afford 0% interest rates, no annual fees and not-so-cheap reward programs?" In 2005, credit card debt in US totaled $800 billion. Credit issuers made a profit of $30 billion. In an effort to democratize financial industry, credit card issuers have been deregulated by the government over the last few years, resulting in elimination of caps on interest rates and fees. Seeing the amount of profit made, it would be appropriate to ask who is paying for that.

The deregulation process has started in the late 1970s when the Supreme Court decided that the banks could charge highest interest in bank's home state and not in customer's. Further deregulation in 1990s meant that fees were to be treated like interest.

A recent study, conducted by Demos, shows that those who can least afford to pay these boundless rates and penalties are the ones paying the price. It's the low income families, Latinos, African Americans and single females who bear the unfair portion of costs to subsidize competitive credit card deals by paying high interests and excessive fees.

Millions of customers are aggressively taking advantage of points, air miles, gift certificates and cash rebates cards. This costs credit companies vast amount of money. Yet, the banks are ready to spend even more money on bonuses to stay competitive and attract more customers. What is more interesting is that they do not lose profits.

Tamara Draut, co-author of a study by Demos research center said concerning these offers, "Someone has to bear the cost of these promotions, and they are often the families already in financial dire straits. The impact of a deregulated credit card industry on American families is clear."

Even a tiny error in managing credit cards keeps many American families burdened with debts. A missing payment by even an hour can increase one's interest rate on that card as well as on other cards. In addition, Demos' research has revealed that one-third of cardholders in America are paying in excess of 20% on interest rates. This can take lifetime to repay for many Americans.

Of course, there have been complaints made before. But when industry representatives are faced with the above ongoing actions, they've got something up their sleeves to suppress outraged customers. According to them, credit industry is expanding, with more credit card applications and options to choose from. They are saying that they are spending a lot of money on improving the quality of information that they provide to customers.

However, the situation didn't yet go out of control. Congress has addressed this problem in a special briefing on August 1, 2007. Furthermore, there have already been hearings regarding the issue. Senators are trying to prevent practices such as: double-cycle billing, huge late fees and mailing unsolicited card offers to minors.

The good thing is that credit card companies have already reacted to heat. The change in business and political climate has forced card issuers to take more consumer-friendly actions. JPMorgan Chase has dispensed double-cycle billing, which imposes interest on previous month's purchases as well as the current month's. Citi announced the elimination of universal default, which raises your rate with one issuer after you pay late with another.

The demand for definitive actions has been increasing over the last decades. The practice of changing the terms of the credit card contract in mid stream is common among issuers these days. According to statistics, late fees have increased from an average of $13 to $28, with a high today almost $40 per late charge. And it looks like nothing much is going to change unless government takes some serious actions.