Sunday, March 06, 2005

THE WASHINGTON POST has a lengthy article today about credit card debt and the bankruptcy bill in the Senate right now.

The bottom line is, credit card companies do not want you to pay off your balance. That's not how they make their money. Credit card companies do not make money from people who have low-interest credit cards and pay their full balance every month. They make their money from the people whose balances are so high, because of high interest rates and penalty fees, that they can only make the minimum payment. They make money from the people who are late with their payments or who miss payments because then the companies can assess even more fees and penalties. The day you pay off your credit card debt is the day the company stops making money off of you; that is why they do everything they possibly can do to ensure that you cannot get to the bottom of that balance.

Bankruptcy experts say that too often, by the time an individual has filed for bankruptcy or is hauled into court by creditors, he or she has repaid an amount equal to their original credit card debt plus double-digit interest, but still owes hundreds or thousands of dollars because of penalties.

"How is it that the person who wants to do right ends up so worse off?" Cleveland Municipal Judge Robert J. Triozzi said last fall when he ruled against Discover in the company's breach-of-contract suit against another struggling credit cardholder, Ruth M. Owens.

Owens tried for six years to pay off a $1,900 balance on her Discover card, sending the credit company a total of $3,492 in monthly payments from 1997 to 2003. Yet her balance grew to $5,564.28, even though, like Hosseini, she never used the card to buy anything more. Of that total, over-limit penalty fees alone were $1,158.

If you are late with a payment even once, you are charged a late fee ranging from $25 to $50, AND your interest rate zooms up to as high as 30%, sometimes more. If those fees push your balance over the credit limit on your card, you get hit with another penalty fee.

So even though you don't put any more charges on the card and you continue to make payments, your balance goes up instead of down. It's called "negative amortization."

So when apologists for the credit card industry like Nessa Feddis, a high-level attorney for the American Bankers Association, say that the purpose of penalty fees is "to encourage people to pay their bills the way they said they would in their contract, to encourage good financial management," they are full of it. When a repayment system is structured in such a way that you cannot repay the debt, no matter how many payments you make, no matter how many jobs you work, no matter how hard you try, then the intent of that repayment system is to keep you in debt, not to encourage you to pay your bills or practice good financial management.

In fact, as the Washington Post article points out, it's easier to get rid of your debt by ending your attempt to pay it off than by continuing to make payments.

The way the fees are now imposed, "people would be better off if they stopped paying" once they get in over their heads, said North Carolina bankruptcy attorney T. Bentley Leonard. Once you stop paying, creditors write off the debt and sell it to a debt collector. "They may harass you, but your balance doesn't keep rising. That's the irony."

The Post quotes a spokesman for one of the credit card companies, who says:

When consumers sign up for a credit card, they should understand that it's a loan, no different than their mortgage payment or their car payment, and it needs to be repaid. And just like a mortgage payment and a car payment, if you are late you are assessed a fee." The 29.99 percent interest rate, he said, is the default rate charged to consumers "who don't met their obligation to pay their bills on time" and is clearly disclosed on account applications.

But mortgage companies and car dealerships do not blanket people with credit card offers. Mortgage companies and car dealerships do not shower financially insolvent customers who are trying to pay off their existing debt with offers for special credit cards for indebted people to "help" them "get their credit back," with promises to raise the credit limit if payments are made on time. Mortgage companies and car dealerships do not send their customers dozens and dozens of mailings with checks in them, which they are urged to use to "take that vacation you deserve," or "pay some of your bills," or "build that deck you've been wanting to build." Mortgage companies and car dealerships, although of course they advertise, do not go totally over the top in their attempt to do everything they possibly can do to get people who can't afford a credit card to sign up for a credit card, and then spend, spend, spend once they have it.

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