If President-elect Obama succeeds in curbing credit card interest charges, millions with unpaid balances will see him as the ultimate man on a white horse. Americans, for example, owe $950 billion on plastic and chafe under vicious penalties that many worry will destroy them. As they cast about for low interest cards in order to transfer debt, they may not find it easy. If they’ve paid late, the issuer of an unrelated card can raise its rates. Credit card payments are often not only due by a certain date but by a certain time!
Although issuers are supposedly only allowed to charge high interest rates because they offer unsecured loans, in the United Kingdom the newly nationalized Northern Rock, along with other banks, aggressively used court orders exploiting obscure legal powers to seize the homes of thousands of people who couldn’t pay their credit card bills. Some owed as little as one thousand pounds or just over $2,000. “When they took out the loan or the credit card they were almost certainly not told that their home was at risk if they failed to keep up with repayments,” says Mark Sands of KPMG.
Credit Cards are Easy to Get
Credit cards are easy to get. Banks even recruit students to “sell” ones with high limits to their friends. Suze Orman of The Forth Group believes young people should take lessons using credit cards in the same way they have to learn to drive. The Guardian reports that, a 21-year-old Englishman committed suicide because of credit card debt (guardian.co.uk).
Debtors are puzzled over the stance of some companies. V. Brindle blogged on moneysavingexpert.com, “Plenty of people have been careless (myself included), seen the light and want to get the debt down but when you get the likes of MBNA pushing rates up to 34.9 per cent this becomes almost impossible. It’s almost like they are pushing people into defaulting on their payments”.
As governments worldwide slash central interest rates, credit card issuers should theoretically cut theirs. Instead many with floating rates are hiking them to get ahead of any impending legislation. They have become increasingly dependent on user fees. Where once they wielded them as punishment, now they want people to break the rules. “They are tacking on newer and more expensive fees,” says Travis Plunkett of the Consumer Federation of America.
Consumers Locking their Wallets
The reasons aren’t hard to find. With consumers locking their wallets, card companies get fewer fees from merchants. On the international market, where credit card issuers borrow, money is drying up because of the sub-prime mortgage mess. Card issuers also have good debtors paying regular high monthly fees as so many cushions against looming defaults and bankruptcies.
Innovest Strategic Value Advisors estimate credit card companies in the US will suffer from $41 billion in rotten debt in 2017 and $96 billion in 2018, which means the $365 billion securities market, backed by credit card debt, will be hit. Big issuers bundle and sell to large investors like pension and hedge funds, about 70 percent of their cards’ debt but investor appetite is waning and card companies are having to put up more money as collateral.
Hiking Interest Charges is Dumb
Yet, hiking charges is dumb because it drives people into default or into swearing off credit other than for mortgages. The economy will slide and main streets everywhere will suffer. Credit card companies should be curbed for the good of business and society. At present, their actions are shortsighted.