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Interest Rates, Credit Cards and the Lethal Fine Print

Every now and again a person who reads the newspaper learns something interesting that people who don’t read the newspaper only learn by first hand experience. What those with first hand experience and newspaper readers alike have learned, is that banks that issue credit cards have replaced parents as teachers of financially responsible behavior. A story appearing in the New York Times a few weeks ago described the practices that an acquaintance had the pleasure of experiencing first hand. The only people who knew what my acquaintance and the reporters discovered were those who read the fine print that accompanies each credit card.

My acquaintance was given a credit card by U.S. Bank when 17 years of age, below the age he could legally enter into a contract. He soon had a $2.00 overdraft which produced a $29 penalty thus causing his account to be overdrawn by $31. He repeated the exercise a few days later and incurred another $29 charge vaulting him into debt to the tune of $62. He was unable to repay the bank within 5 days as required by the fine print and began accruing an additional daily charge of $7. By the time an attorney intervened his $4 overdrafts had produced a debt of more than $200. Following a call from the attorney, U.S. Bank decided to forgive the entire indebtedness and cancel the card. Thanks to the New York Times, we now know that the practice just described (aside from canceling the debt) is only one of the amusing ways banks that issue credit cards increase their profit margins.

One of the most creative techniques is something called “universal default.” If the holder of a credit card timely pays his credit card bill but pays the phone bill, for example, one day late, then, thanks to modern technology, the bank can find out about the late payment and increase the interest rate on the card holder’s unpaid balance even though the late payment has nothing to do with the bank. Late payments of unrelated bills are not the only excuse used by the banks to bump up interest rates. A person who accepts lots of credit cards foisted on the consumer by endless solicitations, may find that taking advantage of the offers of unlimited credit gives banks another reason to increase the interest rate.

Ed Schwebel of Gilbert, Arizona had a card issued by MBNA. In a conversation with this writer he said that he always paid the minimum payment the same day or the day after he received his statement. For many months the interest rate he was charged was 9.2 percent and monthly payments were $502. Last July, without notice, the interest rate was increased to 18 percent and the monthly payments went up to $895.

As he told the New York Times reporter who interviewed him: “All of a sudden in July, they swapped it to 18 percent. No warning. No reason. It was like I was blindsided.” He still does not know what prompted the increase but told this writer he assumes it was because he had too much credit outstanding even though he was within the card’s limits. He may be right.

According to MNBA’s general counsel, Louis Freeh, “If we see indications that a customer is taking on too much debt, has missed or is late on payments to other creditors, or is otherwise mishandling their personal finances, it is not unreasonable to determine that this behavior is an increased risk. In the interest of all of our customers, we must protect the portfolio by adjusting a customer’s rate to compensate for that increased risk.”

I am grateful that Mr. Freeh, having left the FBI where he so brilliantly protected us, is now protecting us by raising the interest rate of card holders who pay some of their unrelated bills late, or accept the endless invitations extended by banks to get and use more credit cards. I am grateful to know that Mr. Freeh is protecting me from the profligate card user. The value of such peace of mind is hard to measure. So is the conduct of the banks.

(Two weeks ago I criticized John McCain for supporting Mr. Bush’s reelection and post-election severely criticizing his environmental policies. On December 13 Mr. McCain had an interview with the Associated Press. He said he had no confidence in Donald Rumsfeld. One wonders if that lack of confidence just manifested itself after the election or was it simply another example of Mr. McCain’s lack of principle? Stay tuned. We may find out.)

CHRISTOPHER BRAUCHLI is a lawyer living in Colorado. His column is syndicated by Knight-Ridder. He can be reached at: Brauchli.56@post.harvard.edu

 

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