5/19/2008

Credit Cards Aren't Evil


How could they be? This sheet of plastic? Die-cut into such a friendly shape, printed with pretty graphics, embossed with your personal information, and - just for convenience - laminated with a magnetic strip containing the same information. It's inanimate - devoid of thoughts or feelings, incapable of morals or emotion. Credit cards are not evil. Yet the debate rages on - pro-credit-card vs. anti - declaring them a useful financial tool to those who use them responsibly, denouncing them as a financial trap, preying on those less informed and yet still managing to harm those who are. Credit cards are not evil!

... But the companies who issue them are.

Now we are take-charge kind of people and constantly advocate financial literacy as well as personal responsibility. But this industry is so wrought with misinformation, myths, scams, scandals, security breaches, immoral behavior, idiocracy, ineptitude, and underhanded business practices, that even the most informed, well-behaved consumer can (and does) get bitten.

So people will (and have) refuted this claim, but now we are laying down the evidence. We present our case of fourteen reasons for why credit card companies are evil, and thus why you should avoid them like the plague. Our exhibits:

  1. Mandatory Binding Arbitration. It can be argued (effectively) that this policy in itself is pure evil. I would not disagree. Many corporations, not just credit issuers, have been burdening their employees, vendors and customers with MBA clauses. These allow the corporation to circumvent the judicial system in disputes and take away your constitutional rights in doing so. Arbitrators have been well documented as being biased to the party that retains them (guess who, the corporation), and rule in their favor more than 90% of the time. New evidence suggests that even those time when they rule in favor of the individual, around half are overturned on appeal. Some even suggest collusion by the credit card companies to ensure that all card on the market had MBA clauses, thus giving cardholders no choice. How about 'none of the above'? Contractually obligated arbitration circumvents your 6th amendment rights by denying access to the judicial system. It's use in credit cardholders' agreements is currently under scrutiny in a class-action lawsuit.
  2. Universal Default. Here is a policy that only Satan himself could love. This policy, also likely to be found in your cardholder agreements, gives your creditor the ability to review your credit - at any time - and adjust your interest rate - for any reason. Taking on too much debt, having too much available credit, a drop in your credit score (oh my!), being late on one payment to somebody else, exceeding your credit limit with any of your creditors, too many inquiries on your credit, new types of credit issued (a new mortgage or car loan), a slight change in the wind.... all legit reasons for a cardholder to be placed in universal default and see their terms be jacked across the board by others participating in UD. That's right. So you were late paying the phone bill due to an error on their part? If it hits your credit report, then you can see the rates go through the roof on all of your lines of credit, despite the late payment having nothing to do with those creditors. And once the phone company corrects their error and puts your account back in good standing, your creditors are under no obligation to change your terms back to their previous state. Think that terms like "too much" and "too many" are broad and subjective? They are.
  3. Double-Cycle Billing. This one is a lot of fun too. It allows for your creditor to calculate your average daily balance from the past two months, instead of just the single previous month. What's the big deal? Well, the average daily balance is how they are calculating the interest that you owe. Using double-cycle billing allows them to charge you interest on debts that you may have already payed off. Yeah, that seems totally legit. Both double-cycle billing and universal default have recently drawn the ire of Congress and have caused both Congress and the Federal Reserve Board to propose legislation and amendments to Regulation Z, respectively, that would ban these practices and regulate many others.
  4. "Late" Payments. One of the more covert methods of screwing the customer is to post their payment after the due date - despite having received it on-time. When employees are rewarded for levying more fees, it's not hard to see how advantageous it is to these folks to just sit on your check for a few hours, or overnight. Another way to accomplish the same result is to make it impossible to pay on time by issuing statements shortly before the due date, or making the due date on Sunday - when no-one is working. Yet another slice of this pie is the practice of moving your due date without notice or reason. Perhaps you have set up your bills to align with your paychecks, and just have you some sanity around paying your bills. But your card issuer decided that they were giving you 9 days too many to get your payment to them. Now why would they notify you of such a change? They don't have to, and their switch to fee income (since there is so much competition on interest rates), has opened a Pandora's box of rogue payment processors. And don't think that electronic payments make you immune to this treatment - they'll sit on those too.
  5. Fees, Fees, and More Fees. Consumers Union - those fine people who produce Consumer Reports - estimates that the credit card companies take in 8 billion annually in fee income alone. The Americans For Fairness In Lending site estimates it was as high as 24 billion in 2004. Someone is paying those fees and it's not us! With employee productivity based on the amount of fees collected, it's no wonder that this revenue stream is growing. CU's creditcardreform.org site has a form you can fill out to express your comments to the Fed in regards to their recent proposed regulatory changes.
  6. Opaque Agreements. Carholder agreements are written in such a way that even lawyers have trouble navigating them. If there were more transparency, people wouldn't sign on for such a lopsided deal. As Curtis Arnold of CardRatings.com says, "You have to be incredibly diligent to avoid the tripwire." As of 2003, it was estimated that only 44% of cardholders had read the entire cardholder agreement. Sounds a tad high, but that's self-reporting for you. Even still, they asked if they read it, not read and understood it. Take a look at yours and see if you can find items 1, 2 or 3 in it. Even if you don't find them, you're likely to find the provision that allows for item 14 - 'terms subject to change at any time, for any reason, without prior notification'.
  7. Targeting Young Kids. Years ago, it was 'Cool Shopping Barbie' - a Barbie doll complete with her own mini MasterCard (plus a larger one for the child), and a cash register to always approve her credit. MC and Mattel took a beating on that one from consumer advocates, and eventually pulled the product - after Christmas. A couple of years ago, Parker Bros. got on the credit gravy train by issuing new versions of Monopoly with Visa credit cards, instead of the famous 'Monopoly Money'. There was some backlash on that, but not nearly enough, as credit is more socially acceptable today. Both of these cases were thinly vailed attempts to get a branded credit card into a minor's hand and get them to associate money, fun, and purchasing power with their company and product at a very early age. Make no mistake, these are not innocent product partnerships. But it doesn't stop with toys. It seems that card issuers are clamoring for ways to get to this untapped market. Untapped because kids under 18 can't legally be issued credit cards. Their solution is pre-paid debit cards for kids as young as 13. Just another way to get in the parents' pocket but now with a tween at the helm. The game is of course to have the parents step in to bail out the kids. Kids and credit cards. As Janet Bodnar of Kiplinger's said, "That's the dumbest idea I've ever heard."
  8. Targeting College Kids. A long-time favorite target of scumbag lenders are America's college students. Universities have sold out to the banks to not only allow debt paddlers to pimp their product on campus, but they've also sold their students personal info to all willing to pay. As a result, you have uniformed young adults swayed into card contracts by unqualified pushers, and an incessant torrent of card offers flooding every student's mailboxes. Yes, these 'kids' are technically 'adults' by law, and are liable for their own actions. Parents, in preparation for college, should be teaching their children about these vultures. That assumes that the parents have a clue. Still, these companies prey on these victims at one of the most vulnerable times of their young lives - on their own, alone, and with limited financial means of their own.
  9. Targeting Bankruptcy Filers. If you are still on the fence at this point, then maybe we have the knock-out blow here. As shown in the movie Maxed Out, one of the credit card companies' favorite new targets is people who have recently filed bankruptcy. Doesn't make sense? When asked about this, the interviewee, Harvard Law Professor Elizabeth Warren, said this, "As one of the vice presidents of MasterCard once explained to me, ... 'we know two things about them - one, is that they can't file for bankruptcy again, and the second is they have taste for credit.' And I said, 'What does that mean?' And he said, 'well, they're willing to make minimum monthly payments, forever. And that's where we make our money.'" What a valuable financial tool.
  10. Advocating Irresponsible Use. This should go without saying after numbers 7, 8, and 9, but there is more to this than just working feverishly to get their product in the hands of those who cannot handle it, nor have the ability to repay. Take one look at their advertising to see this. Walk down the sidewalk and break the heel of your shoe? Don't worry! You can go 'downtown' and not only buy a new pair of shoes, but also a dress to match and a full makeover while you're at it. Nice how that overcast sky cleared up as well. What is the underlying message here? Plastic heals all wounds? Shopping is the best medicine? Life requires takes Visa? Shop, shop, shop, shop, shop. Spend, spend, spend, spend, spend. You can't advertise alcoholic beverages without talking about 'using responsibly'. You can't sell cigarettes without a warning from the Surgeon General - Canada has the best warnings, btw. But these guys can say whatever they want in their advertising.
  11. Trampling on the Federal Fair Debt Collections Practices Act (FDCPA). Collections companies break these laws daily. Harassing people, threatening them with action they can't take - "We're going to come take your house", "you'll wake up and your car will be gone", "We're going to call you neighbors and tell them that you are behind on your bills". Most debt collectors are so dumb that they are breaking federal law and they don't even know it. One of the favorite tactics of late is to try and pin an outstanding debt on somebody else. The reason why they keep doing things like this is because, as shown in the MSN money link, sometimes people will actually pay someone else's debt.
  12. You Need to Establish Your Credit Early in Life.... and all of the other credit myths out there. "Employers check your credit score." "You can't get an apartment with bad credit." "That may be fine for you, but I'm planning to buy a house one day." The industry has long fostered an environment where myths like this and secretive companies like Fair Isaac (home of the FICO score) thrive. No, maybe they didn't start the myths (but maybe they did!), but they also have not denounced them. They've made no attempt to clear the air or set the story straight. See, they don't benefit from informed consumers. There are so many of these myths and half-truths out there that it's no wonder our country is in such a mess financially. "But he said this!", and "I thought that if I did this then...". They don't profit from the truth. The truth is that you don't need a credit card. You don't need to fear/manage your credit score. The truth is that you can buy a house, rent an apartment, buy a car, rent a car, reserve a hotel room, shop online, and get insurance despite never having had a credit card. Never a cardholder. Never an authorized user. Never a revenue stream for the credit card companies.
  13. Loophole City, USA. A lovely place to visit in the fall, flanked by picturesque mountains of debt and a rushing river of ill-gotten gains.... Didn't you ever wonder why banks, credit card companies and even many corporations relocate to places like South Dakota or Delaware? It's not for the scenery. While states like California have passed laws that make life hell for the automotive industry, other states - through actions or in-actions - have created legal heavens for corporate misbehavior. Guess who has taken full advantage? Debt-mongers of all types. For instance, eight of the ten largest credit card companies are located in states that have no cap on the interest rates they can charge. The other two are in Arizona, where the cap is 36%. When do you suppose they are moving?
  14. Whatever Is Next. This list is only their 'greatest hits' to date. Looking forward to Volume No. 2? Congress is eying the industry and calling them out on things like Universal Default and Double-Cycle Billing, and that's great. They need some attention. So what if they are struck down? What's next? These companies have teams of lawyers, lobbyists, and accountants who will work tirelessly to find another sneaky way of sticking it to you, the consumer. Its what they do.
Bees sting. Snakes bite. Credit card companies find ways to take your money. We've been on both sides of this coin. Mrs. NtJS has had a few cards in her life and was a very responsible consumer. Despite never carrying a balance, she still put each and every one through the shredder 4 years ago. We've never regretted that decision, and vastly prefer our current debt-free, credit-card-free life. We think that you will too.

4 comments:

Anonymous said...

Thanks for the insight. Very informative and eye-opening!

Emily @ Taking Charge said...

Credit cards are kind of like guns...it's not the object itself, it's the people who use them. Many people manage to use credit cards wisely without incurring any problems at all. I live within my means, have never had credit card debt I couldn't pay off the next month, and haven't had to worry about the unscrupulous credit card companies. But some people are very financially irresponsible and use a credit card to live above their means, and that's a bigger-picture problem to me.

(not) the Jet Set said...

Emily, I disagree. Credit cards are not like guns, as that completely fails to take into account the fact that there are companies behind these products who are working their butts off to find ways to shoot you in the foot. As Elizabeth Warren said, "I don't know any merchant in America who can change the price after you've bought the item, except a credit card company." Remington, Smith & Wesson, Glock and others put the product in your hand and are done. Visa, Master Card, and Discover are far far from done.

Personal responsibility is a big issue. But the unparalleled evil of these companies and their business practices is something that cardholders like to gloss over. Thus the thrust of this article. These business practices are reason enough not to do business with them, based on morals alone - no matter what the product.

Also, there are a lot of people who have not had any issues with their credit card company. Unfortunately, this is a relationship that only works in the best case scenario as they have layed out plenty of traps for you to step in, should you move left or right of center.

It's a good thing you have not had any issues with them. It's unlikely that you have much recourse (see exhibit A).

JABster said...

Wow, very well-written article! I just discovered your blog today, via PF Buzz. It is rather amazing to consider the Machiavellian ways credit card companies use to get that extra buck.

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