Wednesday, December 21, 2005

Frontline-creditor issues

Since we dont get Directv anymore (I miss TIVO A LOT), we end up watching a fair bit of PBS. Last night I watched Frontline. I had seen ads for the show and I thought I would enjoy the show.

The topic of last night's rerun was "The Secret History of the Credit Card." I actually learned something useful from the show. Boston Globe reviewed the show when it came out, it sums it up well. The host interviewed all sorts of people, the Banking industry lobbyist, interim head of the Office of the Comptroller of Currency- an obscure Treasury Dept office that "ensure(s) a safe and sound banking system for all Americans", Christopher Dodd, Senator from CT, some advocates for credit industry and debtors, and of course the 'typical' American credit card user.

I learned a few things:
1) 55% of Americans pay off their entire balance every month (YEAH!)- this is a much higher number than I thought. At the same time, the average American household carries about $7,500 worth of debt (ugh).

2) READ that unreadable contract that comes with your credit card because it may have THIS lovely provision called universal default- meaning if you default on any of your outstanding debts (default can be defined as loosely as a late payment depending on the contract governing the debt) THEN this default triggers default with your credit card company even though you are not currently late.

3) Andrew Kahr plays the role of a 'bad' guy PERFECTLY- apparently he had several ideas to increase credit card profits including (but I am certain not limited to) reduce the minimum monthly payment from 5% to 2% and 0% introductory rates. Evil genius. The bankruptcy legislation will change the minimum monthly payment sometime next year. Because Kahr did not want his clients revealed I thought I would do a simple google search; I found this

"In documents obtained by The Chronicle earlier this year, Providian founder Andrew Kahr wrote that, in lending to the kinds of high-risk customers Providian specialized in, the "problem is to squeeze out enough revenue and get customers to sit still for the squeeze." (emphasis mine)

And another tidbit: (quoted from the SF Chronicle)
"In a March 1999 memorandum to Executive Vice President David Alvarez, he wrote: "Making people pay for access to credit is a lucrative business wherever it is practiced. . . . Is any bit of food too small to grab when you're starving and when there is nothing else in sight? The trick is charging a lot, repeatedly, for small doses of incremental credit."

THINGS I KNOW AND HOPEFULLY YOU DO TOO.
1) Common sense legal information- read all of your contracts, you have the right to change contract terms (the offeror may not accept those changes- but then do you really want to do business with them?). If you sign the contract, you are assumed to have read AND understood the terms of the contract so you will be held to the terms.

2) New bankruptcy legislation went into effect in October- making it more difficult for middle class Americans to seek a clean slate through bankruptcy. Acc to Frontline show, the three main reasons people seek bankruptcy are a) illness b) divorce c) laid off.

Editorial- I love banks, I am in this house because of one, I got my degrees because of them (and the federal student loan program, see #1 below) and I appreciate the way credit cards help me by itemizing my spending helping me to keep track of where I spend my money. I understand the notion of protecting banks from 'runs' or devaluation (frankly, I dont know what macro/micro factors affect banks) BUT consumers need protection far more than banks. Banks inherently have money therefore are powerful, consumers need money therefore are not in a powerful position (see above quote from Alvarez) when negotiating contract terms.

The bankruptcy law is the antithesis of consumer protection to benefit creditors. Voters file bankruptcy, credit card companies are not voters but appear to have the ear of Congress because of the power (money) they spend. I understand voters run the corporations and are employed by them, but why provide more cover for the industry? The industry is so corrupt that after filing for bankruptcy, the debtors routinely receive many offers for cards from the same creditors whose debts were wiped clean in the bankruptcy.

This is old news of course since the law has been in place for awhile now. It is the Christmas season so I will now go forward and spend. With this entry- I conclude some may want to help me get satellite tv back so I can stop watching thought-provoking maddening shows on PBS and start watching Reno 911 and Weeds again, I would welcome such help. :)


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1.An entry for another day but relevant today: Senate debate focused on student loan changes that would save $12.7 billion over five years. Under the provision, student loan interest rates would be locked in at 6.8 percent and could not be refinanced as commercial rates fluctuate. Private lenders would continue to be able to borrow money at a rate guaranteed to generate a profit.Currently, any time the student loan interest rate is higher than the bank's guaranteed rate, the bank gets to keep the extra profit. Under the budget bill, that windfall would have to be returned to the federal government, a change that should yield $18 billion in savings. "They could give students a lower interest rate, but their choice is to keep interest rates high," said Luke Swarthout of the U.S. Public Interest Research Group. "They're asking students to pay for tax cuts."

3 comments:

Karthik Narayanaswamy said...

Jennifer,

Stumbled on your blog when I was looking through a list of C'ville blogs. Good stuff! I saw that documentary too on PBS (I Heart Frontline!). What amazes me is that so many "average consumers" still don't realize just how long it would take for them to pay off a loan if they made only minimum payments. or don't know that lenders can arbitrarily change the interest rate on money you already borrowed. In fact, when I blogged about this story, I got a comment from an individual who, I learned from her blog, had a credit card company that routinely kept upping her interest rate (29% at last count!), even though she kept making timely payments!

Regulation is needed, but don't count on it. I think the solution is education, helping improve the financial literacy of the common (wo)man.

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