Saturday, March 31, 2007

Living on the Edge of a Cliff.

Mostly ordinary middle-class American families are paying $90 billion dollars a year to the credit card industry.
Harvard Law Professor Elizabeth Warren is an expert on bankruptcy and is an outspoken critic of consumer lenders. She has appeared before the Senate Banking Committee to discuss the abusive lending practices by credit card companies and explains what many of us do not understand about the credit card industry.

Eight billion pre-approved credit card solicitations were sent out last year to American families advertising the lowest interest rate in big bold letters up front. Lurking in the finest print there is; the credit card company discloses that it reserves the right to change the interest rate in what could be written in Farsi as far as anyone understanding what they've written. But, it all comes down to this one statement:

“We reserve the right to change the terms of your credit card agreement at any time for any reason.”

The reasons for changing can literally be just because they feel like it, but here are some common reasons:

Customer is over the limit
Customer is one day late getting their payment in.
Took out another credit card
Dispute with another creditor

The Universal Default Rate is one tactic credit card companies use to maximize their profit. The universal default rate means the credit card company checks your FICO score and if they find the customer does not meet every payment, every where, every time, the credit card company can raise that customer's interest rate to the default rate which can jump your APR as much as 30 percentage points in some cases.

3% cash back experiment:
Ms. Warren's class of 80 Harvard Law students ready to graduate were given the task of figuring out a 3% cash back offer one credit card company was offering in class She asked two questions:

What’s the effective interest rate on this card?

How do you get the money back?

It took Ms. Warren’s entire class of 80 ready-to-graduate Harvard law students the entire time the class ran (one hour) to decipher the 3% cash back offer.

Since the bankruptcy laws became tighter in 2005, the credit card companies, between 2005 and 2006, increased the number of mailings by 30%. They are looking harder for less than stellar customers and pushing them harder with tricks and traps pricing knowing they can hang on to them longer because they would less likely to declare bankruptcy

Credit card companies pushed for this law and literally drafted this law, their lobbyists wrote it and then paved its way through Washington and now they are reaping the benefits.


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