Credit Card Lies, Myths, and Misunderstandings

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What you think you know about credit cards and debt may not be true.
Robert D. Manning, author of Credit Card Nation, busts Five Myths About America’s Credit Card Debt in the Washington Post.

One such myth:

Middle-class American families have long depended on bank credit cards to manage their budgets.

The truth is that the widespread use of credit cards has only been going on for one generation. Most people would know that if they took a moment to think about it—or just if they had a chat with a grandparent, or parent for that matter. No one used to use plastic to buy a coffee, or a pack of gum at the drug store. Not too long ago, it was fairly standard procedure to see people taking out their checkbooks at the supermarket line. After which, it was also standard procedure to balance those checkbooks. I can only imagine the faces people in line behind you would make if you did those things today at some random Target store.

Credit cards only took off with the masses when, naturally, the conditions were established so that banks and plastic issuers were assured they could make money off of the cards:

Credit card use expanded dramatically during the golden age of the industry — beginning in the early 1980s — because deregulation suddenly allowed high interest rates and penalty fees, and credit cards became a major engine of bank profits.

Fun fact:

Nearly half of all credit card accounts do not generate finance and fee revenues.

Yes, banks and credit card issuers take a small percentage every time a card is swiped—so in a way, we all pay for credit cards through inflated prices. But the lion’s share of credit card fees and penalties is paid by a very small portion of consumers:

A carefully guarded secret of the industry is that about a quarter of cardholders have accounted for almost two-thirds of interest and penalty-fee revenues.

Here’s another “myth” that a lot of people would also realize is false if they thought about it:

The credit card industry is so competitive that regulation is unnecessary.

Actually, according to Manning:

The top three issuers — Bank of America, Citibank and Chase — control more than 60 percent of outstanding credit card debt. Consumer choice has declined over the past 20 years…

The final myth, which no one who has had a run-in with a credit card company would believe for a second, is that:

The CARD Act finally protects consumers against the credit card industry’s most abusive practices.

Well, OK, yes, some of the worst abuses are dealt with by the legislation. A Hartford Courant story sums up the reforms, which include these two key stipulations:

•Allow cardholders 21 days to pay their bill instead of 14 days

•Give consumers 45 days’ notice instead of 15 before raising the interest rate, and give cardholders the opportunity to reject the rate increase and pay off the balance at the old rate over a five-year period.

Additional clarification, via a Kiplinger story addressing FAQs on the new CARD act:

Can the bank still raise my interest rate? Yes. The issuer can raise the rate on an existing card as long as you are given 45 days’ notice. If you apply for a new card, however, the issuer may not increase your interest rate for one year, and then it may charge the higher rate only on new purchases, not your existing balance. There are, however, some significant exceptions to this prohibition. Even on a new card, your rate can go up if it is based on an index that fluctuates, such as the prime rate, or if you are more than 60 days late making the minimum payment. (Your minimum monthly payment may increase, too.) Issuers have been switching cardholders from fixed interest rates to variable rates for months to take advantage of this loophole.

So all said, some but certainly not all of the credit card industry’s most unfair and deceptive practices will come to an end. You’ll actually have time to pay your bills before getting hit with a late penalty, and you’ll have the option of bailing on a credit card that’s jacking up your rates beyond all reason. The problem is that there is a long, Whack-A-Mole-like precedent set, in which new unfair fees and deceptive practices quick pop up to replace ones that have recently been outlawed.

The bigger point is that not all banks and credit card issuers are alike. Community banks and nonprofit credit unions are actually reasonable entities to do business with, and that’s no myth.

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