Eight Things A Credit Card User Should Know
- Even if you make your credit card payments on time, the credit card bank can raise your interest rate automatically
if you're late on payments elsewhere -- such as on another credit card or on a phone, car, or house payment -- or simply because
the bank feels you have taken on too much debt.
This practice is called the "universal default" clause and increasingly is becoming a standard clause in credit card agreements.
According to credit card executives, the logic behind universal default is that the bank is not being unreasonable in raising
rates when it has reason to believe that the risk of being repaid by the customer has increased. [Note: Credit card banks
can now easily track your everyday financial activities and monitor your credit score -- see below.]
- Your credit score -- known as a FICO score -- has become a vital statistic for many Americans and can be widely
shared. It is used to determine how much you can borrow, how much you pay for life insurance, if you can rent a home, and,
as already noted, it can be a factor in determining the interest rate you pay on a credit card.
Most Americans don't know what their credit score is, nor how it's computed and with whom it's shared. Your credit score
is usually determined by five factors, with the most important being the amount you currently owe and your payment history
on large debts. (Find out much more about your credit score and how it's tracked, by reading: Credit Scores - What Your Should Know About Your Own.)
- There is no limit on the amount a credit card company can charge a cardholder for being even an hour late with
a payment.
In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted the existing restrictions on late penalty fees. Back
then, fees ran to $5 or $10, and usually did not exceed $15. After the Court's decision, fees soared, reaching upwards of
$30. Since then, the amount of revenue the companies generate from fees (including late charges, over-the-limit fees, and
charges for returned checks) has doubled. Duncan MacDonald, one of the lawyers who worked on the Smiley case, predicts
penalty fees could rise to $50 in another year.
- It's important to read the fine print on your credit card agreement.
Not many people do, however. Even credit card executives and consumer advocates admitted to FRONTLINE that the last time
they read their own contracts was years ago and the credit card agreement is difficult to understand. Tucked into the fine
print that people so often ignore is a clause that allows the company to change your interest rate (APR) at any time, for
any reason, as long as they give you 15 days' notice. (So, Read the Fine Print.)
- Many Americans are inattentive about their credit card accounts.
Approximately 35 million Americans pay only the required minimum -- as low as 2 percent -- of their balance each month.
Sticking to that rate, it could take years to clear their debt and they'll end up paying far more than the cost of the items
or services they bought.
However, many of these 35 million cardholders could pay more than the minimum, and could possibly even pay off in full
their balance some months. But they don't -- even though the interest rate they are paying on their credit card balance is
considerably higher than what they pay on other things and compared to what they're getting in interest income from their
savings account. Is this "financial illiteracy," or just human beings' "irrational behavior?" (Read our report, Credit Cards and Personal Responsibility. Or, try our "Payment Calculator" to see how long it would take you to pay off a balance if you paid just the 2 percent minimum each month.)
[Update - Nov. 2005: Federal regulators at the Office of the Comptroller of the Currency, spurred on by watchdog
groups, are requiring banks that issue credit cards to increase minimum payments in accordance with guidelines laid out in
Feb. 2003. Banks are being required to increase minimum monthly payments to cover all fees and interest incurred during the
month as well as covering at least 1 percent of the principal on the loan. Some banks have raised minimum payments by as much
as 2 or 3%, effectively doubling the common minimum payment of 2%.]
- There is no federal limit on the interest rate a credit card company can charge.
If you've ever looked at the return address on your statement, you may notice your credit card issuer is located in a state
such as South Dakota or Delaware. That's because these are the states that have either weak or no "usury laws" meaning there
is no cap on the interest rate that is charged. (View this map that shows the states where the top ten credit card issuers are located.) The federal government once had national usury
laws that set a cap on the amount of interest that could be charged on a loan. But after the Great Depression, it repealed
them and some states put no new usury laws in place. That's why Citibank, the issuer of Mastercard, moved to South Dakota,
which has no cap on interest rates. (For more on the South Dakota story and how the credit card industry took off in the 1980s,
read The Ascendancy of the Credit Card Industry.)
- Significant credit card debt can put you at a markedly higher risk of bankruptcy.
Going bankrupt usually isn't the result of spending sprees. It's more commonly triggered by job loss, medical problems,
or a divorce. Those hit by any of these misfortunes often turn to credit cards to stay afloat. But if they have trouble finding
new sources of income or an illness keeps them off the job, they often cannot pay off their debt quickly, especially if their
interest rate is high. "They get their feet tangled up in those high interest rates," says bankruptcy expert Elizabeth Warren, "and they just get sunk."
[Update: On October 17, 2005 a new federal bankruptcy law went into effect making it much more difficult to
erase credit card debt by filing for bankruptcy.]
Several trustworthy organizations exist that can advise people whose debt has spiraled out of control, or those who feel
they've been treated unfairly by their credit card companies. For a list of groups offering free advice and for contact information
on how to file a complaint if you feel you have been unfairly treated by your credit card company, read our suggestions on
"Where To Go."
For more information go to
www.pbs.org
