“Invasion of the Moneylenders – Part 6 – Until Death Do You Part”

By Peter Ewart

By Peter Ewart

It is a simple but ingenious concept.  How to make money from that most fundamental and widespread of commercial transactions – a buyer purchasing something from a seller.

In the old days, a person would walk into a store, buy an item, and then leave the store with that item, albeit a little bit lighter in the wallet.  The merchant had the cash from the sale, and the customer had the item. End of story.

Today, at least on the surface, things don’t appear have changed much.  That person still buys something at a store, nowadays probably using a plastic credit card instead of paper or coin.  Afterwards, he still leaves the store with the item, and, yes, the store eventually gets paid through the credit card process. 

People have been carrying out this basic transaction since time immemorial.  As the old saying goes, “the more things change, the more they stay the same.”

But, if you look closely, there is one big difference today.  That person who leaves the store today is very likely carrying a burden.  Unlike earlier times, he is leaving it with a debt weighing on him.  And that debt is owed to the credit card company, along with any accompanying interest or fees.

And the concept gets even more ingenious.  The credit card company not only collects interest and fees from the customer (depending on the nature of the credit card), but it also charges the merchant a fee.  All for using a little piece of colored plastic that costs a few cents to manufacture.  Brilliant!  In the moneylending business, it’s called “killing two birds with one stone.”  And it happens in North America millions of times a day. 

Using the sales tax, governments long ago figured out how to extract money from this basic relationship between buyer and seller.  For their part, the moneylenders finally figured it all out in the early part of the Twentieth Century when the first credit cards were issued – a kind of “private sector” sales tax, so to speak, that adds no new value to the economic cycle, but substantially drains it away.  Since then, the credit card industry, which is allied with the biggest banks and retail chains, has mushroomed into one of North America’s most profitable and powerful industries.

However, ordinary people haven’t made out quite so well.  In the U.S. today, people, young and old, rich and poor, owe $915 billion to the credit card companies.  That amount is actually more than the $900 billion owed in the subprime mortgage scandal that is causing so much turmoil on financial markets.  Indeed, one article in a recent business publication warns that this debt is the next “time bomb” waiting to explode in an already chaotic financial world (1).

Of all the various methods to relieve people of their income and assets, few can rival those used by the credit card moneylenders.  This industry, which has inserted itself in practically every aspect of modern life, uses many of the old usury tricks passed down through the ages, along with a whole bunch of newly minted ones.  Its methods vary in different states, provinces and countries.  However, as the U.S. based National Consumer Law Center warns, because of bank and credit card company deregulation and lack of enforcement, “consumers must look skeptically through any door that opens to invite them to an offer of credit that seems surprisingly attractive.”

Through its political influence, the credit card industry has been able to free itself of many of the restrictions that have limited the activities of the traditional banking sector.  In numerous jurisdictions in the U.S., there is no limit “on the interest or late fees credit card issuers can charge” (2).  As a result, regular interest rates are sometimes as high as 40%.  Most credit card companies also reserve themselves the right to unilaterally raise the interest rate at any time on existing credit card debt.

In the U.S., in addition to the “regular” interest rate, there are often a number of other “regular” fees that are levied on everyone, including a “setting up an account fee,” a “monthly servicing fee,” a fee for paying early, for paying by phone, for paying in person, for paying after a certain hour of the day, and so on (3).  Why anyone should have to pay substantial fees for any of these trivial things, while already paying a hefty interest rate, is never explained.  In any case, the info on these fees is often written in a legalese that is hard to understand and that is buried deep in the fine print of the credit card agreement.

While Canada has more regulation over the credit card industry than the U.S., there is still controversy over fees, penalties and rates.  For example, Canadians who travel abroad can be charged by some credit card companies and their member banks as much as 2.5% on transactions made outside of Canada.  This fee is supposedly to cover the costs of converting the U.S. dollar or other currency into Canadian dollars.  As Duff Conacher, spokesperson of the Ottawa-based Canadian Community Reinvestment Coalition, says, such a practice is “pure gouging” (4).

It is a fact that most normal businesses value customers who pay down their accounts, are on time with payments, and so on.  Not so with the credit card companies.  Behind closed doors, as insiders have revealed, they label these efficient, reliable clients as “freeloaders” and “deadbeats.”

So who do the credit card companies prize as their most “valued” customers?  The most “unreliable” ones: people who default on loans, make late payments, are chronically short of money or living on the edge of poverty or bankruptcy.  Before you start thinking that these grasping moneylenders have morphed into a Wall Street version of Mother Teresa, hear what one Citigroup official has said in this regard:  “If we cut out those people [defaulters], we’re cutting out the heart of our profits.  That’s where we make all of our money” (5)

The “golden goose” of the credit card industry is “penalties” and “fees.”  Think of it this way (and the credit card industry pays accountants and actuaries to do just that). There are hundreds of millions of people who carry credit cards in North America.  Every month, statistical probability will guarantee that a few million of these people will encounter some kind of difficulty in making their regular credit card payment, whether it be loss of job, illness, unexpected expense, and so on.  Others, especially young people at college and university, will simply forget to pay. 

So, it is at this point that a whole range of penalties and fees kick in, and there are a bewildering and dizzying number.  If a person misses a payment or is late even by an hour, he or she likely has a financial penalty imposed and is immediately shoved into a higher interest rate category.  Any “grace period” is automatically suspended and interest is “applied on both the previous balance and new transactions” (6). 

A variation on this is what is called “trailing interest.”  This is “the practice of charging interest on the entire bill no matter what percentage of it is paid.”  So, say you owe $1000 on a late credit card bill.  You are able to pay off $999.  Too bad, the credit card company says, you have to pay interest on the entire $1000 for that month.  It does take some gall to justify such a practice; but the credit card companies do it with a bright face and a nice smile.

It gets worse.  Miss on debt payments to anyone or any company in the entire U.S., and, if your credit card company hears about it, you could be penalized for what is called “universal default.”  It doesn’t matter whether the payment was to another credit card company or to a local department store, a video outlet, or even a library fine.  It doesn’t matter whether it was for $5 or $5000, or whether you didn’t pay because you were ripped off and took it to court.  You will now find that the interest rate on your credit card balance is doubled or even tripled. Suddenly what you thought was a minor financial concern, begins to ache and throb as if a big fish hook was now piercing your lip.

Credit card companies can also use the “universal default” penalty against you if you apply for a new credit card with another company, if you apply for a car loan, if you take on a mortgage, or if for any reason whatsoever your credit score declines.  In essence, people are being penalized with higher interest rates and fees, right at the very time when they need help the most, i.e., when they are laid off or their income declines or they have to go into further debt.

Author James Scurlock questions these practices.  He asks, “Is there any other product for which, after you’ve purchased it, you are suddenly told that you have to pay more?  Or that the terms and conditions have changed?”  “Imagine,” he goes on to say, “that someone calls you one evening and tells you that they need another twenty bucks for the suit you bought last month or five bucks extra to cover the meal you ate at Red Lobster three years ago” (7).  It is truly bizarre.  But the moneylenders in the credit card industry get away with it, time after time, year after year.

One of the credit card industry’s most rapacious practices is what is called “fee-harvester” cards.  These cards are used to prey upon “subprime borrowers,” i.e., people with poor credit ratings.  For example, according to the U.S. based National Consumer Law Center, such a card may have a $250 limit.  But after the client signs up, he or she finds out that there is a “$95 program fee, a $29 account set-up fee, a $6 monthly participation fee, and a $48 annual fee.”  The result is “an instant debt of $178 and buying power of only $72” (8).

It is an ugly thing, but the fact is the credit card companies have a vested interest in keeping a large number of people at or near the poverty line.  The more these people default, the more penalty payments the companies get.  The more desperate people are, the more vulnerable to predatory lending schemes like “fee harvester” cards.  This may explain why U.S. credit card companies are said to have lobbied hard against a $600 tax rebate that was to be granted to taxpayers in 2001.  Why did they do this?  Because credit card holders across the country might use the rebate to pay down their loans, and thus avoid penalties (9).

Youth are targeted for debt, especially college students.  As Scurlock points out, “of all the horrific crimes you can commit in this country, only two have a statute of limitations of more than ten years: one is murder, the other is not paying your student loans.”

Across North America, vulnerable college and university students, away from home, are bombarded with credit card applications, promising all sorts of sweet dreams like 0% interest for the first 6 months, and so on.  For financially inexperienced students who are tired of burnt Kraft Dinner and outrageous textbook fees, the appeal is seductive. 

And the pitch is constant.  Joan E. Lisante, a U.S. writer for ConsumerAffairs.com, kept track of the credit card applications her 22 year old son received.  The number came to 52 in one year alone.

In the U.S., “76% of undergraduate students [have] a credit card.”  But only 21% pay them off each month.  If a student does run up a sizeable debt, it is common practice for the credit card companies to harass the parents, even though the parents are not legally liable.  Their logic is that the parents will ante up so that the kids won’t have a bad credit rating (10).

It has gotten so bad that the Visa credit card company has acquired an interest in a children’s game called “Game of Life.”  Instead of money, guess what?  The kids are given a play plastic Visa card and then get to experience how having a card is just like “a magic money tree” with which they can buy all sorts of cool stuff.  Things get really creepy when you read that, according to a Visa executive, the role of Visa in the game is to provide “the financial education component” of the content (11).

Another factor that separates the credit card industry from other normal businesses is that instead of “supply” eventually meeting or satisfying “demand,” the reverse happens.  “Supply” now increases “demand.”  In other words, as James Scurlock explains, “the more credit you supply, the more demand you create.  The more people become dependent on credit, the more they need to keep going.  Once Americans began using one credit card, for example, they tended to need another.  And then another ... And then they need to refinance their homes to pay off the credit card bills.”

“No other product creates that cycle,” says Scurlock, except perhaps “crack and heroin.”

Savvy observers of the U.S. economy knew way back in 2005 that some dark clouds were coming.  Why?  One of the signs was that the credit card industry spent millions of dollars to lobby Congress to pass legislation that makes it much more difficult or even impossible for individuals to declare bankruptcy and be relieved of credit card debt.  Now, of course, bankruptcy rates are soaring in the midst of the financial storm that has broken out over the U.S. and world economies.  These bankruptcies are expected to skyrocket in the next couple of years. 

Thus, some people will be paying their credit card debt until the day they die.  And even – if it were possible – in the afterlife, if the moneylenders have their way.

Next in series of articles: “The Invasion of the Moneylenders – Part 7 - A Fist Full of Dollars.”

Peter Ewart is a college instructor and writer based in Prince George, British Columbia, Canada.  He can be reached at: peter.ewart@shaw.ca

Notes

1.     Gumbel, Peter.  “The 915B Bomb in Consumers’ Wallets.”  CNNMoney.com
2.    “Credit Card.” Wikipedia.
3.      Carroll, Archie.  “Carroll: Credit Companies Thrive on Consumers’ Carelessness.”
4.      “Flaherty Urged to Address Foreign Credit Card Fees.” CTV.ca.  Sept. 5, 2007.
5.       Scurlock, James.  Maxed Out.
6.      “Credit Card.” Wikipedia.
7.       Scurlock, James.  Maxed Out.
8.       National Consumer Law Center.  “Fee-Harvesters: Low-credit, High-cost Cards Bleed Consumers.”
9.       Scurlock, James.  Maxed Out.
10.       Lisante, Joan E.  “Plastic Peril: Credit Cards and Students.”  Consumeraffairs.com.
11.      Ambrose, Eileen.  “New Game of Life Replaces Colourful Cash with Visa Card.”  Vancouver Sun, Oct. 26, 2007.

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