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HSFPP Weekly Update #109—Avoid High Interest on Credit Cards

Message from Bob & Chris: In addition to using a credit card wisely, it is also important to choose the card that best meets your needs. Card issuers always look for a chance to raise interest rates, which is never in a consumer’s best interest. Recently, credit card companies have raised interest rates on customers whose level of risk is found to be questionable for any of a variety of reasons. They now look at customers’ other creditors, as well as subjective factors such as how much debt you have, or whether you have ever been late on a utility bill payment. This might be a good time for you to read your credit card agreement to be sure under what conditions the card issuer can raise your rates.

Most teachers and Extension agents are eligible for credit union membership, which could get them a credit card interest rate of around 10%. Also, the University of Kentucky Federal Credit Union now even provides awards for airline miles, as well as other incentives.

It is especially important for young people to understand their rights and responsibilities when they have a credit card. Great financial risks are involved, which even many adults do not fully understand or take seriously. Interest rates of 18 – 21% are typical, so young people need to be cautious and use credit cards as sparingly as possible. As is the case with college loans, with credit cards it also is best to take on as little debt as you possibly can. And one of the major keys to low debt is to qualify for, and seek, low interest rates.

 

Website Pick of the Week:

http://www.myvesta.org/

MyVesta is a nonprofit debt counseling service whose Web site offers a wealth of information for consumers. Their publication explaining credit scores is well worth reading.

 

Activity for Educators:

Use the discussion questions below.

In the New$... Mountains of Interest Add to Pain of Credit Cards

“When Ed Schwebel was whittling down his mound of credit card debt at an interest rate of 9.2 percent, the MBNA Corporation had a happy and profitable customer. But this summer, when MBNA suddenly doubled the rate on his account, Mr. Schwebel joined the growing ranks of irate cardholders stunned by lenders’ harsh tactics.”

“‘I paid the bills the minute the envelope hit the desk,’ said Mr. Schwebel, who had accumulated $69,000 in debt over five years before the rate increase. ‘All of a sudden in July, they swapped it to 18 percent. No warning. No reason. It was like I was blindsided.’

“Mr. Schwebel had stumbled into the new era of consumer credit, in which thousands of Americans are paying millions of dollars each month in fees that they did not expect and that strike them as unreasonable. Invoking clauses tucked into the fine print of their contract agreements, lenders are doubling or tripling interest rates with little warning or explanation.

“This year credit card companies are changing the terms of their accounts at a historically high rate, said Michael Heller, an industry consultant.”

“People like Mr. Schwebel, who carry balances from month to month and pay finance charges regularly, feel they should be the favored customers of the credit card business, which is now the most lucrative segment of banking. They make up the profitable majority of the 144 million Americans who have general-purpose credit cards. To a degree, they subsidize the 40 percent of credit card customers who pay in full each month without incurring any fees or charges.

“But increasingly, they say, what should be a warm embrace has turned into a painful squeeze as lenders employ new tactics to extract more and bigger penalties for even the slightest financial transgressions. In the last few years, lenders have more frequently raised customers’ rates because of slip-ups elsewhere, like late payment of a phone or utility bill, or simply because they felt a customer had taken on too much debt.”

“Edward L. Yingling, executive vice president of the American Bankers Association, said bankers must have the flexibility to change terms on short notice. The bankruptcy filings of the 90’s—many by customers who had been paying their bills on time—caught banks off guard, he said.

“Lenders decided they needed to watch for signs of trouble elsewhere, like missed car payments, he said. In those cases, he added, there are only two logical responses: ‘We’re not going to let you have this credit card loan anymore and we’re going to say, “Pay it off,” or we can say, “You’re now more risky; we’re going to raise your rate.”’

“Still, some critics say the severity of the punishment does not match the risk of default. The suddenness and perceived unfairness of the penalties have left many consumers feeling burned by lenders who relentlessly courted them with promises of low rates.

“To some cardholders and consumer advocates, credit card companies are acting like modern-day loan sharks, strong-arming their customers to pay more—with no legal limit on how much they can charge.

“In eight years, the major card companies have increased the fee charged to cardholders for being even an hour late with a payment to $39, from $10 or less.”

“Duncan MacDonald, who, as a lawyer for Citibank was involved in its successful case for deregulation of fees before the United States Supreme Court in 1996, now says he fears that he helped to unleash a monster.

“Until that ruling, most banks still charged an annual fee of about $25 for the use of a card and a single fixed rate to all borrowers, usually around 18 percent. Applicants either qualified for the privilege of carrying a card or they did not.

“‘I certainly didn’t imagine that someday we might’ve ended up creating a Frankenstein,’ said Mr. MacDonald, who predicted that the penalty fees could rise to $50 in another year. ‘I look at that and I say to myself, “Is $50 a fair fee, plus a 25 percent interest rate and all those other fees that are thrown on, for folks who are probably not that risky? Is that fair?”’”

“The case that opened up the industry came in 1978 when the Supreme Court decided that a bank could charge its cardholders any rate allowed in the bank’s home state. Major banks swiftly moved their credit card operations to places like South Dakota and Delaware that had removed caps on interest rates. There is no federal limit on consumer credit rates.

“After that ruling on interest rates, credit cards, which until then had generally been an uncertain business, started to look potentially lucrative. Banks began to innovate and compete. They cut the required minimum monthly payment to 2 percent of the balance, from 5 percent, to encourage customers to borrow more and stretch out the repayment. They dropped annual fees and dangled offers of low interest, or none at all, to lure new customers.

“At the same time, legal teams crafted contracts of 12 or more single-spaced pages that gave banks the leeway to change their terms whenever they wanted.”

“John Gould has worked in and around the credit card business for 25 years, but he said he was shocked when his wife tried to make a last-minute payment over the phone and was charged an extra $15.

“‘What a rip,’ he said. ‘That does get me mad.’

“Fees like that are accounting for a greater share of the revenue that card companies garner from their customers. Last year, they collected $11.7 billion in penalty fees, more than half of the total $21.5 billion in fees they collected from cardholders, according to CardWeb, a research firm.”

Source: Adapted from the story in the New York Times , November 21, 2004.

Originally reported by Patrick McGeehan, Lowell Bergman, Robin Stein, and Marlena Telvick, and written by Patrick McGeehan.

Credit Unions are a good place to begin looking for a credit card because they offer lower interest rates. At the University of Kentucky Federal Credit Union, for example, members can get a Visa or MasterCard at 11.4% APR. Because a credit union is a nonprofit and is owned by its members, it is less likely to raise your interest rates. Credit unions usually have better service, fewer fees, and lower rates on loans. The UKFCU requires no minimum balance for checking accounts, which is helpful to students on limited budgets.

 

Activity for Students:

Discussion Questions :

1.) After reading this week’s article In the New$..., what do you think about credit cards and credit card companies?

2.) Should consumers be given at least six months to pay off current debt if credit card issuers raise their fees or their interest rates?

3.) What are the benefits of having a good credit history?

4.) What can you do to build a good credit report?

5.) What should you look for in selecting a credit card?

 

Kentucky High School Financial Planning Program

http://www.ca.uky.edu/fcs/hsfp

The purpose of this Web site is to assist county extension agents, credit union educators, and high school teachers in improving the economic well-being of our constituency, beginning with today’s students; and also, to assist teachers in Kentucky in meeting KERA’s goal that all students become technologically literate. Weekly Updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators.