The Independent Investor: Credit Card Companies Raising Rates Again
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While the meat and potatoes of the act won't become law until February of next year, some of the provisions are scheduled to kick in on Aug. 20 of this year. One such provision requires that credit card issuers give 45 days notice before hiking interest rates compared with 15 days notice that is currently required.
Specifically, the top 10 credit card issuers are not only raising interest rates but they are lowering credit limits and raising minimum payment requirements at the same time. The banks had warned legislators back in May that if the act passed they would be forced to react. They claimed that the new law would prevent them from managing "borrower's risk" without raising rates and fees.
As a result of the recession, banks have been hit with a record number of credit card charge-offs, which are debts they are required to write off when borrower's enter bankruptcy. These write-offs now number 10.44 percent, a post-war record. The second reason rates are rising stems from the scarcity of consumer credit overall. Since the credit crisis, financial institutions have become risk averse when it comes to lending us money whether for a car, house or a new television. They have lost so much money over the last few years that in order to lend, they are demanding higher rates from us.
Of course it couldn't happen at a worst time for the beleaguered consumer who has been using his credit card as a stop-gap measure. Many of the unemployed, for example, are using their cards to buy food and basic staples, according to Eve Schatz, founder of the Free Legal Clinic of South Berkshire County based in Great Barrington. Others, she says, have been paying their monthly mortgage payment with plastic in an effort to stave off foreclosure.
"It's really hard for people in that situation," explained Schatz, "we've had many reports of people using credit cards in this way. Remember, too, that once a credit card borrower defaults on a payment interest rates can automatically jump to 31-32 percent.”
The new law would prevent card companies from raising rates on existing balances unless the borrower was at least 60 days late. It would also require the original rates on existing balances to be restored if payments are received on time for six months. Unfortunately that won't happen until next year while raising fees and rates now could be the tipping point for many consumers, possibly forcing them into bankruptcy.
In Washington, D.C., politicians are also miffed at what they see as at least a violation of the spirit of the new law. I called one of the region's representatives about it.
"Just two months ago, we took a major step toward ensuring fairness and protecting consumers from exploitation by passing the bipartisan Credit Card Holders Bill of Rights," said Scott Murphy, Columbia County's newly-elected congressman, "As we work to stabilize our economy, we need to protect New York's hard-working families from unfair and predatory practices."
And yet banks have been able to raise rates and fees on credit cards with impunity for years. They are not charitable organizations nor do they need to justify raising rates. If you don't like it, it's up to you to do something about it. Here are a few things you can do to protect yourself:
You can vote with your wallet and take your business elsewhere. There are thousands of credit card companies you can use besides the big ones with at least two right here in the Berkshires.
Greylock Federal Credit Union offers its members credit cards without the predatory pricing practices that consumers may encounter with the money center banks.
"Credit cards are just another form of lending to us, like mortgages," said Kent Hudson, chief of operations for the cooperative. "We don't do it to make a quick buck off our members."
He gave one example where they differ from the big issuers.
"At the Cooperative, cash advances are charged at the same interest rate as purchases, unlike other card issuers that charge as high as 22 percent for the advance privilege."
Of course in order to apply, you have to open a cooperative member account with them but the process is far from onerous.
"All you need do is fill out an application," John Bissell, senior vice president of marketing and administration, assured me, "we can not only save you money but we treat you like a human being and not a number."
For those readers in Columbia County, New York-based Kinderhook Bank also offers a credit card. The bank, like Greylock Federal, came out of the financial crisis stronger than before and rejects the practices of the bigger credit card issuers.
"We are not in that game," said Dori McDannold, director of marketing for the 155-year-old bank. "We haven't raised rates on our credit card in over 18 months. It's just not our gig."
You can also check out www.credit.com if you want to do a little comparison shopping for the best deals nationwide in credit cards. Another way to avoid getting hosed by credit card issuers is to maintain strong credit scores and reports. This flags your account as low risk, enabling you to sidestep a lot of the card issuer's tricks. Their main concern is protecting themselves against high-risk borrowers.
Finally, be selective where and how you use your cards. Like Big Brother, credit card companies can see and track your purchases. They look for patterns such as using the card for mortgage payments, pawn shops, and other pattern-setting purchases and borrowing that might indicate financial trouble. Finally, keep your balances low and if possible pay off your debt as fast as you can.
Bill Schmick is a registered investment adviser and portfolio manager with Berkshire Money Management (BMM), managing over $180 million for Americans in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or at wschmick@berkshiremm.com. Visit www.afewdollarsmore.com for more of Bill’s insights.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM.
