Credit card lenders’ practices and ethics under increasing scrutiny
Posted on August 26, 2007
Filed Under rates |
Some call it legalized loan-sharking. Others insist it’s the only way to ensure all Americans have access to credit.
In either case, the lending practices of credit card companies are coming under increased scrutiny these days. Congress is considering legislation that would curb companies’ ability to raise interest rates on cardholders’ unpaid balances and to charge interest on late or over-the-limit fees.A growing chorus of consumers complain that the nation’s soaring credit card debt is more a product of banks preying on the vulnerable than Americans’ careless management of personal finances.
The court of public opinion already appears polarized on what critics call predatory lending practices - companies charging exorbitant interest rates and penalty fees.
“It’s not illegal, but it’s very unethical,” said Richard Cook, a former federal government analyst and author. “It’s legalized loan-sharking.”
Advocates of change say tougher rules could reverse a troubling trend toward more people finding themselves crushed under the weight of credit card debt.
But if Congress cracks down as threatened, Americans with bad credit could struggle to get a card.
And fees for all cardholders could go up. That could mean fewer customers and less profit for banks.
According to the Federal Reserve System, the credit card industry is the most profitable of all lending enterprises. In 2005, the nation’s six-biggest credit card companies collected $7.4 billion in penalty fees, or about 12 percent of the $60.3 billion revenues they received, according to a U.S. Government Accountability Office study.
Some lawmakers have held up Premier Bankcard, the Sioux Falls, S.D.-based subprime lender, as the bank that symbolizes the issue - for better and worse.
Interest and fees are a big income driver for Premier, accounting for 90 percent of revenue. Among the fees the company charges are one-time account set-up and program fees, annual fees, late fees, overlimit fees and fees for paying over the phone or online.
Most of the company’s 3.2 million accounts have very low borrowing limits, around $300, and generate little for the privately held company. “The fees are an important part,” Premier Bankcard president and chief executive Miles Beacom said. “We have to make sure we protect ourselves.”
FEES PILE UP
Larry Fiddler took out a Premier card after talking with a customer representative who, he said, did not mention anything about fees. Yet before he used the card, the $200 in charges assessed by the bank came to him in the mail.
For her part, Eva Gilbert concedes she didn’t scrutinize every line of her agreement when she signed up for a credit card to help manage the bottom line of her small business. So when the costs of divorce sent the Eagle Butte, S.D., woman spiraling toward bankruptcy and behind on her monthly card payments, she was shocked when the lofty interest rates and penalty fees kicked in.
“They’re not willing to work with you and help you get caught up,” she said. “I mean, you read the small print, but you don’t understand it.”
Beacom said his company provides a necessary service to a segment of the population that wouldn’t otherwise have access to credit. It’s a high-risk group, one that justifies charging high fees to offset the risk. The company cites surveys that consistently show more than 90 percent of their customers are satisfied with their cards.
Interest rates can jump from 9.9 percent to 19.8 percent if a customer pays Premier Bankcard late, Beacom said. The rate will return to 9.9 percent if a customer pays on time for three months, he said.
“Often, regulators don’t understand about the fees. It’s a convenience fee,” said Dana Dykhouse, president and CEO of First Premier Bank, a sister company in Sioux Falls, likening it to buying milk at a convenience store near home at a higher price rather than at a discount grocery store across town.
‘POLITICALLY APPEALING’
Industry leaders and analysts insist that what companies have done is take on the risk of extending credit to consumers who might not otherwise have access to it.
“Capping interest rates sounds politically appealing,” said Bill Keenan, a credit card analyst in Wilmington, Del. “But I think it’s a negative. Your good credit customers end up subsidizing poor credit customers. Or you just decline to serve them, and you shut off credit to them.”
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I found http://www.credit-card-news.us very informative. The article is professionally written and I feel like the author knows the subject very well, keep it that way.
It’s up to the Damn States to start enforcing Usury Laws, or start passing strong usury laws. Congress is in the back pocket of these thieves and their strong lobbyists, who are nothing but legalized bribers. So forget Congress to do anything but fill their pockets, from “K” Street.