Personal Finance Lesson Plans

In 2006 the credit card industry reported a record breaking 17.1 billion dollars earned from penalty fees alone; this is a 15.4% increase over 2005 and a tenfold increase from 1996! Incredibly they are on track to beating it again in 2007 with no end in sight! How is this happening? The main reason is, “Universal Default,” a little known clause written in the fine print of your credit agreement.

These obscene profits have caused the red flags to go up and the Congress has taken notice. In April 2007 a Congressional Sub-Committee hearing chaired by Mrs. Maloney ran only one hour and thirty five minutes but produced amazing results. These hearings influenced Federal Reserve Chairman Ben Bernanke in his studies of the credit card industry to report back to Congress in May 2007. He made detailed suggestions on how to reform the credit card industry’s practices that will greatly help the American consumer on how to make informed decisions when choosing a credit card company.

But you must first understand how this deception from the credit card companies’ work in order to fully appreciate what Chairman Bernanke is proposing the Congress should do.

It all starts with understanding your credit card agreement. Your credit card agreement is purposely written in extremely small print that requires a magnifying glass to read it; they know that this will discourage most people. It is also written at the 27th grade level, which even a Harvard Business graduate would have trouble deciphering. If you attempt to try and understand it you will discover deep within the agreement the “universal default” clause. Universal default allows your creditor to raise your interest rate if they deem you a credit risk. So what can deem you a credit risk?

Going late with another creditor is the biggest one. Even if you are on time with payments to the creditor raising your rate, by you going late with any other creditor that is reported on your credit report you run the risk of having your interest rates raised. If you are maxed out with your credit cards you can be deemed a credit risk and have your interest rates raised. It has been reported that people have had their interest rates raised because they were charging to fast on a new credit card even though they were never late. So basically the credit card companies have the power to raise your interest rate at will for almost any reason. To add insult to injury you are never informed that your interest rate is about to be increased, you will simply just find out when you open up your statement one day and notice in went from 9% up to 25% or more.

Now the situation becomes a lot worse. When your interest rate is raised to loan sharking rates your minimum payments often double if not triple. So the people who were barely getting by with their minimum payments in the first place are now stuck up the creek without a paddle. Thus forcing them into default only to trigger late fees and eventually over the limit fees. This must stop! The credit card companies are making off like bandits.

As of right now there are over 6,000 issuers of credit cards in America. An interesting fact is that the top ten issuers control over 90% of the market. During the Congressional Sub-Committee hearing in April only one company out of the top ten admitted that is would cease to continue using universal default. However this has yet to be seen as to whether they are sticking by their word.

Now what can be done? Since the Federal Reserve Chairman Bernanke stepped in he has made excellent suggestions to make reforms to the credit card industry, here are some of them.

First, he would require credit card issuers to provide clearer and easier-to-understand disclosures to customers. So people do not unknowingly put themselves in a dangerous financial position.

Second, in particular, the new disclosures would highlight applicable rates and fees, particularly penalties that might be imposed.

Third, require card issuers to provide forty-five days’ advance notice of an increase in the interest rate or any other changes in account terms. So that consumers will not be surprised by unexpected charges and will have time to explore alternatives.

My personal feelings are that while these suggestions by the Fed Chairman are on the right track and should become legislated reforms, it won’t happen unless enough people contact their representatives in Congress and force it to happen.

It’s time for all Americans to take action and stop accepting the lies and deceit perpetrated on them by these predatory lenders. This is a great start given to us by the Fed Chairman and we have to make other Americans more aware to actually what is happening to their financial future, all for the greed of the credit card companies’ pockets.

To accomplish this we must get the word out! Copy this article and post it in lunch rooms, put it on your blog/website, or just pass this information along to friends and relatives. We must let Congress know that we are watching them and you want the Federal Reserve Chairman Ben Bernankes’ reforms to be put into law!

Steve Bis is a senior debt analyst and research assistant with the USCA/Roll Law Firm which practices primarily in debt settlement

Tags: congressional hearing, credit card debt, credit card industry, credit card reforms, federal reserve

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