Charging Blindly Ahead Through Revolving Door of Debt
A few weeks ago, I received some special “checks” from my three credit card companies inviting me to use them to pay off outstanding balances on other cards at very attractive low interest rates. I usually don’t carry balances over from month to month since the average annual interest rate on my cards is an outrageous 18%. But the idea of carrying balances for six months at rates as low as 6.9% was intriguing, so I did it.
In one case (Bank of America Visa), the first monthly statement received after I did this clearly separated the low-interest balance transfer from purchases and cash advances, and the blended finance charge was properly calculated.
In the other (Citibank Aadvantage Master Card), however, I was amazed to see the prevailing 17.15% rate applied not only to the transfer amount but to all my purchases, even though I had paid the account balance in full the previous month. How could this be possible?
I asked the customer services representative. She explained that the (very) fine print that went along with Citibank’s 6.9% balance transfer checks states that any such transfers are paid off first, leaving the remaining balance to be carried at the usual interest rate. Since my payment had been received after the transfer amount hit the account, Citibank proceeded to use it first to pay off the transfer amount and applied the rest to the previous month’s balance. Of course, that triggered the usual “average balance” calculation based on the carry-over amount and my current month’s purchases, on which interest was calculated at 17.15% per annum (or 1.43% per month), and which resulted in a sizable finance charge.
By that time I was not treating the customer service representative with much respect, although she was just the messenger. But neither was she offering to rectify the situation, which I regard as a real scam. And me a longtime customer! I imagine that many other cardholders were surprised as well. I decided to tear up my card. Hopefully, other customers will do the same.
Credit card companies are primarily responsible for the tremendous increase in personal bankruptcies in the United States, which in 1997 reached 1.33 million filings, an all-time high, and $23.1 billion in total credit card defaults. Almost half of that amount was bankruptcy-related. The average after-tax income of those who filed for personal bankruptcy was $19,800. Their average credit card balance was $17,500. Something definitely is wrong with this picture.
Yet credit card companies continue to proselytize and expand credit limits. In the past two years alone, aggregate credit limits increased 50%, to $1.78 trillion. Potential charging “power” is now 8.3 times current indebtedness. While credit card debt is still a small fraction of total consumer debt, at around 5%, it is the fastest growing component. In the present interest rate environment, banks and other credit card issuers well can afford to cover their dollar losses annually due to defaults. The “spread” between the average interest rate charged to consumers on credit card debt of around 16% and their cost of funds at 5% to 6% is tremendous, even though most people (60%) do not carry outstanding balances on their credit cards from month-to-month.
During fall registration week on college campuses around the country, the walkways are dotted with tables where students--even 17-year-old freshmen--are invited to sign up for a Visa or MasterCard with a $1,500 credit limit. No questions asked. When you want to outfit your dorm room with a cool stereo system, TV and VCR, this is a lot easier than appealing to Mom and Dad, who might question why you need all these diversions when, in their minds, they’re paying you to study. And so they sign up in droves. With a satisfactory payment history the limit will be raised automatically, and can easily reach $3,500.
On one recent week alone I received six invitations for new cards, each with large pre-approved credit limits and very attractive teaser rates. So the competition is fierce. And understandably so, given the growth in credit card purchases on which the companies typically make 2% to 3% in addition to what they earn on balances carried over from month to month.
I don’t begrudge the credit card and other consumer credit companies their right to be in business. I am critical, however, of their exploitation of a consumer public which, in large part, lacks credit discipline and education. The college students I’ve talked to don’t seem to care that they’re being charged a usurious interest rate. Their concerns are merely whether they can afford to make the minimum monthly payment and what to do when their card is “maxed out.” But to that last question there’s an easy answer: Just go get another one.
