Credit Cards: Plastic Explosives

Every day thousands of consumers — hard working businessmen and women, mothers, fathers, grandmothers, students — walk through airport security where their purses, bags and wallets are screened and cleared on their way to their new destinations. Yet, unbeknownst to their carriers and their fellow passengers, they are carrying highly explosive materials onto their planes — ticking time bombs in the form of little pieces of plastic, that could blow up at any moment and incite what could amount to personal financial terror.

I am, of course, talking about credit cards, because the banks that issue them have had the ability for years to explosively increase the interest rates on your outstanding balances for virtually any reason. Through the artifice of carefully thought out contract provisions and court precedents in selective states, banks have had free reign to set off their own version of a hidden bomb, which consumers have carried willingly after being aggressively solicited and enticed into playing the card issuers’ profit making game.

I’ve Been “Jacked”!

The explosions set off by card issuers when they cause your interest rates to go through the roof, and thus increase the minimum payments and the cost of the purchases you already made with the card and had budgeted for can set off other explosions in your vicinity — the rates on other cards in your purse or wallet may blow up too. While it can only take one rate increase to ruin an already weak budget, a series of such explosions often leads to the destruction of a consumer’s finances and bankruptcy.

Interest rate increases on credit cards have  been a huge source of profits for banks, but the current recession and the joblessness faced by millions of card holders has caused the detonation of their little bombs (which banks handed out like candy prior to the recession) to blow up in their faces.

The default rate on these credit card accounts are at historic highs. For more on this, please read this recent post on Mike Shedlock’s (Mish) blog: reflections-on-credit-card-fees-and-chargeoffs.

Now however, with the soon to be enacted CARD ACT, many of the banks’ trick and trap policies, which were designed to ensnare the public into becoming debt servicing slaves, are about to be curbed. However, banks will and have already begun to adjust to the coming new reality by finding new ways to profit from their plastic explosives.

One way they are doing that is by switching consumers’ interest rates from fixed to variable rates based on a formula that might charge say 12.9% above prime. Although this switch may not seem like a big deal right now with federal interest rates at historic lows, those rates will most certainly rise in the not too distant future, perhaps significantly, and when they do, the cost of using their credit cards will increase for consumers. In other words, those plastic explosives will detonate in consumers’ wallets yet again, sending potentially more shock waves through their finances. And unfortunately, I suspect that the timing of these future interest rate increases will come at a time when our economy is widely recognized to be solidly on the path to recovery.

For another example of how far those who issue standard grade plastic explosives in the name of profit will go to get around the CARD Act, please read nationally-syndicated personal finance columnist Kathy Kristof’s personal story in her recent blog post, Credit Reform and My New 703.8% Card.

Kristof wrote:
“Consumer reporters were all crowing about a 79.99% rate credit card that was launched in response to credit reform a few months ago–collectively horrified that a law designed to cut rates and eliminate sneaky fees was inspiring increasingly abusive bank behavior. I thought that was about as bad as it gets until I took a close look at the statement for my new Macy’s card, which I had opened with “instant credit” while Christmas shopping. It made that 79% card look like a bargain.”

Kristof went on to explain that based on her average daily balance of $3.41, her minimum charge worked out to “an actual annual percentage rate” of 703.80%!!!! Also, her blog linked to a good resource over at www.getrichslowly.org for additional information about the CARD ACT. Click: An Act To Inhibit The Placement Of Small Incendiary Devices Upon American Citizens to read more.

For additional information about the CARD ACT and to learn how you can win free help from Consumer Recovery Network, a fair and ethical debt settlement firm, by sending it your personal story of what happened to you when one of your banks triggered your plastic explosive and the rate on your credit card went sky high, visit CARD ACT-CRN Contest.

Credit Carnage

More than half of the debt-stressed consumers my company has consulted with over the past several years has indicated that “a plastic explosion” was a key factor in their being unable to keep up with their debts. Furthermore, if you’ve been hit by plastic shrapnel, I know that you will easily relate to the analogies I have used here. I know they are appropriate because I work with the carnage of these explosions every day.

Looked at in this perspective, card issuers and their fee traps have already blown up the finances of millions of consumers. How many more explosions will we see between now and February 22nd when rate jacking, as we have known it, will end? While I see the variable interest rate ticking time bomb referenced earlier in this blog as having the greatest potential to spark renewed controversy over credit cards, many card issuers have already mentioned they will revert back to the annual  fees they charged years ago and that they will also be limiting the rewards programs that they used to compete for market share and consumer loyalty.

{So, what’s in your wallet?}

By the way, a great place to compare credit card interest rates and reward programs and to read consumer feedback about specific cards is “Credit Card Ratings”. Now, more than ever, in this rapidly changing credit card marketplace, it is important that you use respected, reliable resources to research and understand the credit products you are using or considering using.

Banks – Saints or Enablers?

CBS Money Watch Blogger gets it wrong!

Click here to read how wrong ( http://moneywatch.bnet.com/retirement-planning/blog/what-works/too-much-credit-card-debt-dont-blame-your-bank/101/ )

With quotes like the following, you should really click the linked blog above for the full read:

“Of course, the U.S. congress passed the CARD Act as a measure to “protect” consumers from the fee-generating schemes employed by greedy credit card issuers aimed at targeting defenseless consumers. PAHLEESE! I’m not buying it.”

“The real losers here are the millions of folks who use credit cards…”

“If you think banks credit-card fees are the source of your financial troubles, then you have the mind set of a money LOSER.”

While Mr. Martin ends his brief article with sound advice, everything but that last paragraph leads me to question the depth of thought he lent to the topic prior to his missive.

• Mr. Martin, are you aware of the pernicious practice of rate jacking a consumer on purchases already made and budgeted for, thereby increasing the costs of that purchase (often dramatically)?
• Are you aware of the now widely documented and recognized arbitration scam used by major card issuers and foisted on the American public?
• How about that card issuers securitized and sold to investors credit card receipt portfolios and that this practice, as quoted by the FDIC, accounted for half of their funding source, a practice which enabled  unhealthy expansion in credit (remind you of sub-prime mortgage backed securities anyone)?
• Have you seen any of the investigative reports on credit card practices done by Frontline which establish these practices as having been developed to profit off the backs of low income and middle class Americans?

I can only hope some of what he wrote was tongue in cheek, but it does not appear so.

While I would tend to agree with the underlying message of your words suggesting consumers become more constrained and informed in how they approach spending and budgeting, and agree that this premise should extend to governments and politicians, please do not suggest that banks are innocent in their enabling the credit fueled boom/bust we are experiencing.

Did consumers create the sophisticated loan programs that are not done blowing up in our nations face? No. How could they? They are money LOSERS in your words.

Were banks bailed out having the costs pushed onto the American taxpayer (that would be you and your CFP clients)?

Are banks done failing and being taken over by the FDIC as a result of their risk taking?

Mr. Martin, how many people do you speak to every day that lost a portion of their income in the current recession and who made every effort to communicate with their creditors openly about the need for a payment restructuring whose plight falls on deaf ears, only to then have their rates jacked from 8.9% to 29.9?

Mr. Martin, are you heavily invested in bank stocks? Did you personally, or in your capacity as a financial planner encourage others to; invest in pools of securitized debt obligations?

An End to Rate-jacking is Cause for Celebration!

CRN is Holding a Contest!

It’s our way of celebrating the fact that in February of this year, the Credit Card Accountability Responsibility and Disclosure (CARD) Act will prohibit credit card companies from rate jacking consumers. This means that their pernicious practice of increasing interest rates on consumers’ existing account balances, for virtually any reason, will end. But before going into the contest details, I want to quickly outline why CRN believes that the end to rate jacking merits a contest.

There are many reasons why so many consumers struggle with crushing debt;  cut in work hours, job loss, medical issues, and other difficult events are just some of the more common. But rate jacking (also known as universal default) is another reason, and when consumers are rate jacked, they become the victims of greedy creditors searching for higher profits under the guise of risk management.

One of the effects of rate jacking is that it increases the cost of purchases consumers have already made and budgeted for. It also increases their monthly minimum payments, making it almost impossible, for many consumers to keep current. Some of these consumers end up having to pursue credit counseling, debt settlement, or bankruptcy to deal with their debts. Case in point, over the last several years, more than half of all the consumers CRN consulted with had had their interest rates increased.

Adding insult to injury, when a consumer is rate-jacked by one creditor, the consumer’s other creditors usually follow suit. Often, when this occurs, consumers who would have been able to get out of debt by applying a simple debt rollup strategy, lose that option.

During the months leading up to implementation of the CARD Act, the media has spilled a lot of  ink on this topic. I have also written about and spoken against rate-jacking more times than I can count. So, the end of rate jacking is a GREAT REASON TO CELEBRATE!

Contest Details:

Submit your personal rate jacking story to CRN no later than 1/31/10. You can submit it via the comment section of this blog post (see below), by email (michael@consumerrecoverynetwork.com) or send it by regular mail:

CRN
217 Cedar St. #281
Sandpoint ID 83864

There is no limit on the length of your story. The only criteria are:

1. You must describe having been “jacked” by one or more of your creditors and the effects that it had on you.
2. Your entry should indicate if you have resolved the problems that resulted from the rate jacking. If you have , please explain.
3. You must include your name (first name is sufficient), a valid email address and your daytime phone number (when submitting your story via the comment section of this blog, this information will not be made public). You may be contacted by me or another CRN debt specialist for additional details about your experience.

The winner will receive a FULL CRN Membership at absolutely NO COST! This includes the CRN “Settle Down” educational series, full service debt negotiation services, and unlimited one-on-one assistance and support from an assigned CRN specialist for a period of 2 years. Depending on the winner’s financial circumstances, and the results of program implementation, the prize value may be worth thousands of dollars. (prize is transferrable; see below)

CRN staff will read all entries and choose 6 semi-finalists. Then, a panel of CRN specialists, personal finance writers and well-known consumer advocates will choose a winner from those 6. The contest winner will be notified by phone and email, and will have 90 days to claim their prize. Their story will be published here on 2/15/2010.

What a unique opportunity to tell your story & win a great prize that can help turn your finances around!

Michael Bovee, CRN President

NOTE: CRN reserves the right to publish any contest submissions, but will never publish your name. CRN understands that some consumers who enter CRN’s contest may have already resolved the financial problems that were the consequence of their having been rate jacked. For example, they may have been forced to file bankruptcy. Therefore, if one of these consumers is chosen as the winner of CRN’s contest, that individual can transfer their prize to a friend, family member or co-worker who can benefit from a CRN membership. Who doesn’t know someone who could use help getting out of debt? Especially in this economy!