Saturday, January 19, 2008

Beware of the Predatory Lenders - IN YOUR WALLET

With the constant headlines about predatory mortgage lending, I've wanted to write about what I see as the biggest predatory lender - credit cards.

Now, thanks to Pier One and Chase Bank, I've decided to write something about the abusive credit card industry.

Credit card companies are largely unregulated and, thanks to some states' dismal laws, are able to charge interest rates equivalent to loan sharks - we're talking 25%-40% interest rates. I wouldn't doubt there are higher rates being charged (especially with fees tacked on).

Credit card companies are notorious for giving people more credit than they can afford - meanwhile handing them terms that will bury them in bottomless sea of debt should they become even momentarily late with their payments. In the process, credit card companies are systematically destroying the credit of millions of Americans - most of whom can least afford it. Charging anyone 25%-40% is dooming them to failure and, therefore, is predatory.

How is this possible?

Summed up by the PBS Frontline :


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 But after the Great Depression, it repealed them and some states put no new usury laws in place.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)
It is time to end this predatory behaviour that is destroying too many lives.

If a borrower is so risky that the bank claims they need 25%-40% interest rates to compensate, then the bank should not be lending money to that borrower. 25%-40% interest rates will surely doom the borrower - and this is the heart of predatory lending.

I call upon our Representatives in the State and Federal government to do something about this. Protect and help consumers. Here are some ideas of what the government should do:
  • Encourage competition in the credit card industry. Offer favorable lending terms to banks that agree to interest rate limits.
  • End loan sharking. Stop charging the poor rates that will doom them.
  • Don't allow credit card companies to make predatory loans. Force lenders to establish that borrowers can pay off reasonable penalty rates, otherwise don't allow them to make those loans.
  • Lend money directly to consumer. Why should banks and institutions be the only ones to get fair borrowing terms.
  • Increase credit card companies' disclosure obligations. Make it mandatory for a credit card company to let customers know how long it will take to pay off their credit card if they pay the minimum balance.
  • End "Universal Default" - the raising of a borrower's interest rates when they default or have too much debt with different lender.

If our government is serious about ending predatory lending, then they should not ignore the credit card industry.

What's Pier One Got to Do With It?

Pier One & Chase bank "congratulated" me by "upgrading" my account to Platinum level and issued me a new Pier One store card. However, after a call to the credit card's Customer Service, I learned that Pier One and Chase were deceptively issuing me a Mastercard. There was no Mastercard logo on the card nor mention of Mastercard anywhere, including in the agreement, nor did I ever apply for a full-blown credit card. This was supposed to be a "store" card. Plus, the new card's agreement obligated me to spend at least $1000 over the next 12 months at Pier One - something I'm not likely to do - thereby violating my "agreement" and harming my credit rating. The Customer Service supervisor said they felt consumers would appreciate the upgrade. I didn't and closed my account.

Like this post? Let us know:

11 comments:

Bob Kelly said...

We cancelled our Pier 1 card too, and J.C. Penney for the same reason. I absolutely agree with your analysis. And yet, the invitations arrive daily, like spam in e-mail, looking for more suckers. The warning flags are all there in the agreement, couched in mind-numbing legalese and written in fine print that I imagine only a minority of those who sign up understand or bother to read.

We used to pay full balances in thirty days or less, using the credit card as a convenience, not a borrowing instrument. Then the time window between receipt of the bill and the required payment date was made shorter and shorter, so that now payments can be due in as little as 15 days from receipt of the bill.

Although we now use a bank-connected debit/credit card, we still have to specify credit when using it in order to avoid being charged a "debit fee" on both sides of a transaction, one by the store or business and another by our own bank.

The local electric utility, for example, charges a "convenience" fee for paying a bill with a card. The bank treats the transaction as a debit, triggering the $1.50 charge at their end.

It is, or ought to be, and once was, criminal behavior to charge the usurious fees that are now so commonplace in commerce.

Good job in shining the light on this. I hope it helps someone to avoid succumbing the lures of the predators.

Anonymous said...

Why would ANYONE have a store credit card? I guess as a first credit card when you are 19 or something because you HAVE NO CREDIT but NO ONE has a store credit card over the age of 30. You should only EVER have 3 at THE MOST credit cards in your wallet and they should not be a high interest rate store credit card. One MasterCard, one VISA and one other like Discover or AMEX AT THE MOST and I am not saying that this is good either. One or two is all you really need and ONLY FOR EMERGENCY USE not to buy that stupid Pier1 vase or chair. No wonder you hate buying real estate - you must have such high credit card debt from your 25% store credit cards that you must be burried. Still paying for that piece of crap from last year on that high interest card? What a smuck!

Cayo Dave said...

Bob - Thanks for you comment. I didn't realize that our local electric utility charged a fee for using a card. I really wanted to write about the powerful credit-card lobbyists - and how they have prevented any progress on predatory practices in their industry.

Anonymous - Why would I have a store credit card? It was the 10% discount I was offered when I bought a $700 couch, saving me $70. I didn't need the credit and paid it off immediately.
As for your second gem, "No wonder you hate buying real estate - you must have such high credit card debt from your 25% store credit cards that you must be burried. Still paying for that piece of crap from last year on that high interest card? What a smuck!"
It's not that I hate buying real estate, its that I hate buying a depreciating and/or overpriced asset. And just as I predicted, it was a very wise move.
And no, I don't have store credit cards burying me in debt. Thanks to not burying myself during the real estate mania, I am quite liquid, have many investments, and continue to build equity.
I'm not foolish enough nor desperate enough to accept 25% interest rates.
If you read the post - meant as a warning to consumers and a plea to legislators and regulators - you'd see I cancelled the Pier One account.

Anonymous said...

Saving 10% is the way store sucker idiots into taking their out their precious offer of a credit card. Sure, you closed it but took a hit on your credit report. It will be there for 10 years or more - check out Equifax - they keep it on for 10 years AFTER the last transaction. By closing it, you just dinged your report and lost valuable points in your score at the same time. Every financial analyst will tell you NEVER OPEN A CHARGE CARD YOU DON'T NEED! That $70 dollar will cost you in the long run-foolish. And for someone who raves about saving you didn't do yourself anything good. Why didn't you wait for a sale? Or better yet, bargain? You probably could have saved that 10% if you had asked at the time of purchase. I do it all the time - the retail price is there but can be haggled if you had spoken to the manager and said, I am paying cash and want 10% off. You might have been surprised - they probably would have bent. Plus, being a local, you would have gotten it. Pier1, Sears, I have used this all over town to much success. Lessons to be learned.

Anonymous said...

I agree that it was a foolish move to open a charge card just to get a small discount. Live for today, don't think about tomorrow, spend! spend! spend! while you can. What a load of B.S. Pardon me but did you really need to save 10% by putting it on a new credit card?

IF YOU CAN'T AFFORD TO PAY CASH YOU SHOULDN'T BE BUYING ANYTHING IN THE FIRST PLACE!

Obviously, since you paid if off in one month you could have afforded the cash and, as a cash buyer, you could have asked for the 10% discount anyway as you weren't leaving the store without the purchase.

Sounds very foolish to me to get easy credit which you will never use again. Don't try making a major purchase soon where you will need a copy of your credit report as all those opening and closing of charge cards is bound to show up as a negative.

Cayo Dave said...

Obviously, since you paid if off in one month you could have afforded the cash and, as a cash buyer, you could have asked for the 10% discount anyway as you weren't leaving the store without the purchase.

Eh - the purchase was already on closeout prices. They weren't going to take another 10% off. But then again I've never acted like an entitled douche. I'll take your word that you get an extra 10% for being an dick.

Don't try making a major purchase soon where you will need a copy of your credit report as all those opening and closing of charge cards is bound to show up as a negative.

Actually, you are incorrect. The card was so small in relation to the size of my credit lines that it has no bearing. Plus, being the youngest/newest account it will have very little bearing. Further, without any debt load, there is no debt-to-credit ratio change.

Now - why do I think this is the same anonymous responding to their own previous comment?

Anonymous said...

$700? For a sofa from crap Pier1? AND you took out a credit card to get 10% off?

Who buys furniture from Pier1? Do you also buy your clothes from KMART? Do you order a steak at a seafood restaurant? Do you drink the water in Mexico?

And anytime you open and close an account your credit report gets dinged. Don't you get it? YOU GOT HAD! Big Time!

Cayo Dave said...

$700? For a sofa from crap Pier1? AND you took out a credit card to get 10% off?
Who buys furniture from Pier1? Do you also buy your clothes from KMART? Do you order a steak at a seafood restaurant? Do you drink the water in Mexico?

And anytime you open and close an account your credit report gets dinged. Don't you get it? YOU GOT HAD! Big Time!


anonymous - O.k. I get it. You are an elistist. Loud and clear.
You should take all that money you have and get yourself a new personality.

Anonymous said...

I like the part about demanding 10% off because you are paying cash, I'll have to start trying that, lol

Anonymous said...

Here's one link where I'm with you all the way Cayo. These credit card companies and retailers are SLEAZY.

Anonymous said...

Sorry Cayo Dave - got to agree with the poster that Pier 1 sells garbage. It's all very bad quality. With all the new furniture stores in town begging for business and with cash in the bank, why oh why did you shop overpriced Pier 1 and open a charge account only to close it in one month? You're not to swift when it comes to your money are you Cayo Dave?!