Credit Card Debt: The Common Denominator
By Tamara Draut
March 13, 2006 - 12:12pm ET
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If you carry a credit card and have a balance, you’ve probably learned first-hand that credit card companies are raising the monthly minimum payment required. The change stems from guidelines issued last year by the Office of the Currency of the Comptroller, one of the regulators of national banks and credit card companies. The new guidelines require credit card issuers to ensure the minimum monthly payment is high enough that it pays off some principal, not just finance charges and fees.
Before the rules changed, most card issuers had lowered their monthly minimum payment to just two percent of the balance. Essentially, this made it easier for borrowers to maintain high balances, while providing a rich gravy train of interest revenue for the lenders.
As an AP story noted yesterday, the hand-wringing on Wall Street over lost profits has already begun. Lehman Brothers analyst Jason Goldberg said that the new rules could cost JP Morgan and Citigroup each about $500 million in losses and lost revenue this year. Even if these companies lost revenues and profits, they’d still be remarkably successful and highly profitable businesses, something the article fails to mention. The reality is that the credit card industry is the leading profit engine of the banking industry, generating pre-tax earnings of over $30 billion annually.
Over the last decade, all the major credit card companies have increasingly engaged in business practices that are best described as capricious, abusive and deceptive—and most importantly, fantastically profitable. The new gotcha tactics include tripling your rate for a run-of-the-mill tardy payment—after issuing a $39 fee. Then there’s universal default, the policy of preemptively raising the rate on your card if you’ve paid late to another creditor. These practices have drained households of billions of dollars—over $10 billion in late fees alone in 2003. And generated billions of dollars in interest revenue.
Since the OCC announced it guidelines, there’s been no lack of news articles about what the impact will be for borrowers. When it comes to debt, the media are on the case. So are companies bombarding the TV and radio airwaves with promises of debt consolidation and credit repair. In fact, the only people not paying attention to the issue of debt are our elected officials. After years of stagnant incomes and rising costs, Americans have piled up more and more expensive debt. Yet politically this issue isn’t even on the radar screen.
So here’s a tip: If you’re a political consultant looking for a winning issue for your candidate, one that would distinguish them from the pack, take a look at debt in America. Half of all households have credit card debt—and most are desperate for relief from the vise of exorbitant interest rates and spiraling fees. Living in the red is a common thread that joins the young with the old, the middle class with the working class, and the college-educated with non-diploma holders. It’ll take someone brave enough to stand up to the powerful banking lobby—but, as one person reminded me recently, there are more debtors than there are bankers. The debtors just don’t have anyone fighting for them.
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