March 7, 2007
In what played out as a good versus evil scenario, Senators and consumer advocates battled with three of the most powerful men in the credit card industry at a Capitol Hill hearing today.
One of the witnesses was Wesley Wannemacher, a former Chase Bank credit card holder who placed $3,200 of wedding expenses in late 2001 on his card. He never spent another cent on that card, yet his debt to Chase ballooned to $10,700 -- that is until Chase saw his name on the witness list last week and forgave his debt.
Unfortunately, not every American in debt can be made the poster boy of unfair credit practices.
Even the Republicans expressed outrage:
"Credit card debt is often seen as a very personal problem, but the burgeoning level of household debt in America has implications for the entire nation," Sen. Norm Coleman (R-Minn.), ranking minority member said. "Over the past 25 years, U.S. household debt has ballooned from a collective $59 billion in 1980 to approximately $830 billion in 2005.
"Even more staggering, the number of consumers filing for bankruptcy has increased by 609 percent," Coleman continued.
Didn't Norm Coleman vote for the BAPCPA "reform" on 2005? Oh now you speak up. Those bankruptcy numbers are back down again -- mainly because Congress, for the most part, closed the courthouse doors. It makes you wonder who they should have been focusing on all along. Credit card profits were already up an astounding amount prior to the Bankruptcy changes in 2005. All Congress did was take away the one credible threat that consumers had to hold the predatory credit card companies in check. Now, other than being shamed at these hearings, there is little to nothing that keeps them from exploiting their power over the consumer.
Throughout the hearing, the crowd that packed the room occasionally burst into laughter at the seemingly absurd credit card terms and the lack of direct answers from the bank executives.
Of the more than a dozen complaints raised against the credit card companies, Levin also raised an issue which he coined "trailing interest."
Trailing interest is the practice of charging interest on entire bill no matter what percentage of it is paid.
"Suppose a consumer who usually pays their account in full, and owes no money on December 1, makes a lot of purchases in December, and gets a January 1 credit card bill for $5,020," Levin said. "That bill is due January 15. Suppose the consumer pays that bill on time, but pays $5,000 instead of the full amount owed. What do you think the consumer owes on the next bill?
"If you thought the bill would be the $20 past due plus interest on the $20, you would be wrong. In fact, under industry practice today, the bill would likely be twice as much. That's because the consumer would have to pay interest, not just on the $20 that wasn't paid on time, but also on the $5,000 that was paid on time.
"The consumer would have to pay interest on the entire $5,020 from the first day of the billing month, January 1, until the day the bill was paid on January 15, compounded daily," Levin continued. "In our example, using an interest rate of 17.99 percent ... the $20 debt would, in one month, rack up $35 in interest charges and balloon into a debt of $55.21."
Bruce Hammonds, president of Bank of America Card Services, Richard Srednicki, chief executive officer of Chase Bank USA and Vikram Atal, Chairman and CEO of Citi Cards, all said that "trailing interest" is a practice shared by various lending schemes but gave no specific examples.
Sparking around round of laughter, Chase's Srednicki said, "I think the large majority of our customers understand (that grace periods only apply to accounts paid in full)."
Another topic that was discussed that needs more attention is the practice known as "double-cycle billing." The practice involves tacking on fees calculated based on two prior months. This makes the effective interest rate greater than the stated contractual interest rate. In essence, the practice can effectively double the interest rate on a credit card.
For instance, say that you pay your bill in full every month, but one month you pay the minimum payment, under double cycle billing, the credit card company will charge you interest on the month that you have already paid off in full.
Yes, a national usury law and other regulations are definitely needed to stop these abusive practices. Even Adam Smith in the Wealth of Nations, the Bible for free-market believers, argued for strong usury laws.