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Credit Cards - Public Enemy No. 1

By Ralph Nader, Public Citizen, July 11, 2003

What’s the most self-destructive thing that consumers carry around in their pockets? It’s those little pieces of plastic - credit cards - that are becoming the greatest menace to the financial health of low-, moderate- and middle-income Americans.

There was a time when the “plastic money” was considered a convenience for consumers and a boon to the small merchants who couldn’t afford to establish elaborate credit programs to compete with the national chains. Today, the credit-card industry has become a hungry monster that is devouring the hopes and dreams of low-, moderate- and middle-income families across the nation.

Credit-card companies are rapidly moving to the front of the pack of predatory lenders. They are targeting sub prime audiences, the working poor, college students and people with blemished credit histories.

This segment of the unsecured credit market is a rich lode of fees - over the limit charges, late-payment fees, cash advance fees. Desperate for any kind of credit, lower-income borrowers are willing to pay outlandish fees to establish an account. Deceptive offers of easy credit combined with the desperation of credit-starved consumers too often end up in foreclosures, bankruptcies and devastated families.

The “come on” is sometimes a promise of a relatively low interest rate on the outstanding balance each month. But, the “low rate” disappears quickly under the terms hidden in the fine print of the mandatory disclosures accompanying the credit card. A payment arriving a day late, or a charge that exceeds the credit limit by a few dollars can trigger a 300 percent increase in the interest charges.

A 9.9 percent interest rate trumpeted prominently in the credit card advertisements can become overnight a costly 28 percent on outstanding balances. When cardholders reach their borrowing limit, the companies frequently offer to increase the limit for an additional fee, all the while pushing the cardholder deeper in debt with increasing fees and interest charges.

Dr. Robert Manning, author of “Credit Card Nation,” who monitors the credit-card industry closely, says that the companies market the sub prime borrowers because they are more likely to keep high balances on their accounts month after month, often paying only the minimum finance charges. In contrast, the wealthier cardholders pay off the balances each month and, as a result, pay the least in interest charges and fees.

In the back rooms of credit-card companies, Professor Manning says these more affluent quick-paying cardholders are referred to ironically as “deadbeats.” Manning notes that the largest increase in consumer credit-card debt in recent years is among households with incomes of less than $10,000 according to the Survey of Consumer Finance conducted by the University of Michigan.

Some of the offers that fill mailboxes would make a common pickpocket thief blush. The First Premier Bank of Sioux Falls, S.D., recently sent out a massive mailing, telling recipients that they had been pre-approved for a 9.9 percent fixed rate gold Master Card. In the fine print of the disclosure form, the bank revealed that the credit would be limited initially to $250. From that sum, the bank would deduct an annual fee of $48, a “program” fee of $95, account set up fee of $29, and a monthly participation fee of $6. After the bank pockets these fees, the holder of the pre-approved card would have $72 available for credit.

Credit-card solicitations continue to grow. From 1997 to 2001, the mailings rose 66.7 percent from 3.5 billion in 1997 to 5 billion in 2001. Credit-card debt rose from $554 billion to $730 billion in the same period. Net revolving credit-card debt climbed from $51 billion in 1980 to more than $610 billion in 2002.

In addition to targeting the sub prime market, credit-card companies have been zeroing in on college students and, in some cases, even high school seniors. Manning says college students are a lucrative market for the card companies because the students lack knowledge of personal finance and are largely free of consumer debt. Manning’s research finds that three out of five college students had maxed out their credit cards during their freshman year. Three-fourths of the students, according to Manning, were using their student loans to pay for their credit cards.

The credit-card industry has become increasingly concentrated. In 1977 the top 50 banks controlled more than 80 percent of the credit-card market. Today, only 10 banks control more than 80 percent of the market. These banks and their credit-card affiliates wield heavy influence in the Congress, particularly in the House and Senate committees with jurisdiction over the financial industry. And this is an industry that dumps generous bags of cash in the campaigns of key politicians in a position to block any attempt to provide consumers protections against the gouging by the credit-card operatives.

MBNA, the nation’s second-largest credit-card company, was the No. 1 contributor to President Bush’s 2000 campaign and inaugural festivities. Not only the president, but both Democratic and Republican members of Congress, particularly those on the Senate and House Banking and Judiciary committees have shared in the campaign largesse of the credit-card industry. A coalition of banks, automobile finance companies and credit-card companies distributed $20 million in individual, PAC and soft money to members of Congress in the 2002 election cycle.

The aggressive tactics of the industry and the reach into the lower-income market has created a few problems for the industry. Not the least of these is the fact that the deceptive practices and the gouging with high fees and unconscionable interest rates have destroyed many working families, forcing them into bankruptcy. The credit-card operators now are fearful that protections in the bankruptcy courts may prevent them from collecting all their ill-gotten gains.

As a result, the banks and credit-card companies are demanding that Congress change the bankruptcy laws, remove consumer protections and make certain that they will be able to collect every dime from the people they have pushed into bankruptcy. In effect, consumers would be placed in a virtual debtors prison and left with no chance to resume their lives as productive citizens. The bankruptcy courts would be converted into glorified debt-collection agencies.

The House of Representatives - which has become an easy rubber stamp for the banks and other corporate interests - has already agreed to the wipeout of bankruptcy protections. It is still in the Judiciary Committee in the Senate, but the heavy pressure is on to send this pro-bank, anti-consumer legislation to the president this session.

Congress should be concentrating its fire on the banks and credit-card companies that have lured so many hard-pressed low-income consumers into costly unmanageable credit-card debt. Instead of going after the perpetrators of the credit abuses, Congress, led by the dictatorial Texas representative, Tom DeLay, wants to punish the victims. In this Congress, the only thing that talks is money - money that is given with greedy expectations of legislative booty.

About the Writer

Ralph Nader is a consumer advocate and former Green Party presidential candidate. Readers may write to him at: Public Citizen, 1600 20th Street NW, Washington D.C. 20009,

This story ran on The Online Arbiter on 07/11/2003.