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EIGHT Things A Credit
Card User Should Know
Even if you make your
credit card payments on time, the credit card bank can raise your
interest rate automatically if you're late on payments elsewhere --
such as on another credit card or on a phone, car, or house payment
-- or simply because the bank feels you have taken on too much debt.
This practice is called the "universal default" clause and
increasingly is becoming a standard clause in credit card
agreements. According to credit card executives, the logic behind
universal default is that the bank is not being unreasonable in
raising rates when it has reason to believe that the risk of being
repaid by the customer has increased. [Note: Credit card banks can
now easily track your everyday financial activities and monitor your
credit score -- see below.]
» Your credit score -- known as a FICO score -- has become a vital
statistic for many Americans and can be widely shared. It is used to
determine how much you can borrow, how much you pay for life
insurance, if you can rent a home, and, as already noted, it can be
a factor in determining the interest rate you pay on a credit card.
Most Americans don't know what their credit score is, nor how it's
computed and with whom it's shared. Your credit score is usually
determined by five factors, with the most important being the amount
you currently owe and your payment history on large debts. (Find out
much more about your credit score and how it's tracked, by reading:
Credit Scores - What Your Should Know About Your Own.)
» There is no limit on the amount a credit card company can charge a
cardholder for being even an hour late with a payment.
In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted the
existing restrictions on late penalty fees. Back then, fees ran to
$5 or $10, and usually did not exceed $15. After the Court's
decision, fees soared, reaching upwards of $30. Since then, the
amount of revenue the companies generate from fees (including late
charges, over-the-limit fees, and charges for returned checks) has
doubled. Duncan MacDonald, one of the lawyers who worked on the
Smiley case, predicts penalty fees could rise to $50 in another
year.
» It's important to read the fine print on your credit card
agreement.
Not many people do, however. Even credit card executives and
consumer advocates admitted to FRONTLINE that the last time they
read their own contracts was years ago and the credit card agreement
is difficult to understand. Tucked into the fine print that people
so often ignore is a clause that allows the company to change your
interest rate (APR) at any time, for any reason, as long as they
give you 15 days' notice. (So, Read the Fine Print.)
» Many Americans are inattentive about their credit card accounts.
Approximately 35 million Americans pay only the required minimum --
as low as 2 percent -- of their balance each month. Sticking to that
rate, it could take years to clear their debt and they'll end up
paying far more than the cost of the items or services they bought.
However, many of these 35 million cardholders could pay more than
the minimum, and could possibly even pay off in full their balance
some months. But they don't -- even though the interest rate they
are paying on their credit card balance is considerably higher than
what they pay on other things and compared to what they're getting
in interest income from their savings account. Is this "financial
illiteracy," or just human beings' "irrational behavior?" (Read our
report, Credit Cards and Personal Responsibility. Or, try our
"Payment Calculator" to see how long it would take you to pay off a
balance if you paid just the 2 percent minimum each month.)
» There is no federal limit on the interest rate a credit card
company can charge.
If you've ever looked at the return address on your statement, you
may notice your credit card issuer is located in a state such as
South Dakota or Delaware. That's because these are the states that
have either weak or no "usury laws" meaning there is no cap on the
interest rate that is charged. (View this map that shows the states
where the top ten credit card issuers are located.) The federal
government once had national usury laws that set a cap on the amount
of interest that could be charged on a loan. But after the Great
Depression, it repealed them and some states put no new usury laws
in place. That's why Citibank, the issuer of Mastercard, moved to
South Dakota, which has no cap on interest rates. (For more on the
South Dakota story and how the credit card industry took off in the
1980s, read The Ascendancy of the Credit Card Industry.)
» Significant credit card debt can put you at a markedly higher risk
of bankruptcy.
Going bankrupt usually isn't the result of spending sprees. It's
more commonly triggered by job loss, medical problems, or a divorce.
Those hit by any of these misfortunes often turn to credit cards to
stay afloat. But if they have trouble finding new sources of income
or an illness keeps them off the job, they often cannot pay off
their debt quickly, especially if their interest rate is high. "They
get their feet tangled up in those high interest rates," says
bankruptcy expert Elizabeth Warren, "and they just get sunk."
Source: PBS
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