Wednesday, December 05, 2007

Credit Card Usury

Kevin Drum has an interesting post over at Washington Monthly on Universal Default and the credit card industry. Anyone who uses credit cards should read it. In he links to Roy, the Consumerist who has some entertaining liveblogging of Tuesday's Senate showdown between Carl Levin and the credit card industry: here is a bit from the live blogging:

9:34: And we're off. Levin has arranged for an interesting hearing. The first consumer we will hear from is Janet Hard. Janet is married to a steamfitter. She has a Discover card that jumped from 18% to 24% because her FICO score dropped. [Note: FICO = credit score. –ed] When Janet complained, the rate dropped to 21%. Discover's President will testify today.

9:37: Levin is most incensed by the retroactive nature of rate increases. Take a consumer whose debt jumps from 15% to 27%. That new rate applies not to new debts, but to all incurred debts.

....9:41: Bonnie Rushing has two Bank of America cards. One is associated with AAA. Both cards had an 8% rate. BoA bumped the AAA rate from 8% to 23% because Bonnie's FICO score fell. It didn't matter that her payment history was perfect. Bonnie isn't sure why her FICO score dropped, but she thinks it may be because she opened a store-branded card at Macy's to receive an immediate 10% discount on a purchase, unaware that it would affect her FICO score.

....9:46: Most people don't realize that their FICO score drops even if they approach — not exceed, approach — their credit limit.

9:47: The Committee asked who determines a FICO score, who determines when a rate jumps because of a FICO score. The answer: computers.

9:47: Issuers don't know why a FICO score drops. They have four "reason codes," generic statements like: "balance grew too fast compared to credit limit," or "balance on bank cards is too low."

9:48: By law, consumers are entitled to know who supplies credit data. Even with this data, few consumers realize that a rate hike was caused by a lower FICO score.

....10:25: Levin is really pissed that these rate increases are retroactive. More troubling, none of the consumers testifying realized that rate increases applied to past debts.

I travel a lot and I have to use credit cards all the time. Mostly it is an Amercan Express card so I can keep all of my business expense on a single card (plus I get airmiles). I am very careful to pay the minimum plus my actual charges every month even though my expense reimbursement may not have come yet. Once mistake with a card payment and you are screwed. If you are ever dumb enough to get a cash advance on a card you really begin to understand how you are being held hostage by the credit card companies. Unless you pay the card off completely that cash advance will sit there at the highest interest rate and just compound away. Any payments you make go against other charges before they touch the cash advance principal.

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