Sunday, January 18, 2009

Loan sharks (aka VISA, MasterCard, Discover, etc.)

[Photo from]

What would be a fair interest rate on an unsecured loan? Credit card companies essentially provide unsecured loans to the public. They send out millions of credit card applications every day (I must get at least half of those!) inviting sundry folks, even those with challenged credit, to sign up for a credit card.

Do you know the term used by credit card company loan sharks when one of those applications is returned with the proper information and signature? GOTCHA!

The credit card companies have made the criminal activity of loan sharking a cornerstone of their business.

Let's say you have several credit cards on which you are paying a portion of the balance each month. One of the first things you might have noticed is that the time between when you receive your bill and when that bill is due is shrinking. And the credit card companies don't tell you that. They have good reason as we shall see.

Let's say that for credit card company A, you always pay at least your minimum balance on time. You've been a customer of this company for years and have a spotless credit record.

Let's say that you also have a credit card at JC Penney. One month you mislaid the Penney's bill, forgot about it and thus didn't make the payment in a timely fashion. Your credit card company A, without your knowledge, is watching you at all times and is immediately informed that you missed that payment to JC Penney. It so happens that you also applied for another credit card with company B, and company A was immediately apprised of that. You were also a day late on your payment to credit card company C because they compressed the time between when you received the bill and when it was due without notifying you of the change.

You normally don't pay much attention to your credit card bills. But when company A sent its bill, you decided to check out the interest rate, which had been 8.9 percent. You almost have a heart attack on the spot. Your interest rate has been raised to 30 percent! Thirty percent!

They can't do this, you scream.

Ah, but they can. And they do. All the time. It's a little clause in your agreement called Universal Default. Although it's criminal, it's legal.

Some states, such as New York have outlawed the practice. Some companies claim they do not engage in the practice (be very, very skeptical!). Some say they plan to quit the practice.

Universal default has sent many unsuspecting folks to the poor house, or put them on the street.

"Universal default is a relatively new provision that has been added to the credit card member terms and conditions by credit card companies. Universal default basically allows creditors to review a customer's credit report on a regular basis, and if there is any change that has negatively impacted their credit score a new, higher interest rate can be applied."

Here's how they get you:

1. Making a late payment (even just one time) on a credit card, mortgage, utility or car payment.
2. Going over the limit on any credit card.
3. Carrying too much overall debt.
4. Using 50% of the credit line of one particular card.
5. Having too much available credit and open trade lines.
6. Making too many credit inquiries.
7. Getting a new mortgage or car loan.

As says, "Even if you have a great credit history, one financial bump in the road can cause an economic collapse."

An attorney from Everett, Washington, Mary Schmitt, claims the universal default provision has caused many of her clients to file for bankruptcy protection. Universal default, she says, "causes everything to snowball. That's why they're all in bankruptcy."

A credit card company can raise the rate so high - Schmitt says she's seen one at 52 percent, that no individual or family can possibly pay off the balance! [A mafia loan shark would be jailed for such usury!]

When a person fails to pay, the account is turned over to a collection agency, which in turn obtains an injunction and then garnishes the person's wages. Soon, that person defaults of her mortage and foreclosure looms.

In Washington state, bankruptcy filings have jumped by 40 percent this year.

There is a little bit of hope. The Federal Reserve Bank has issued new rules to better protect the public from predatory and criminal credit card companies. says that the "card companies will be prohibited from charging interest on balances that were paid off in the previous cycle." The companies cannot raise interest rates on pre-existing balances. They can "raise rates only on balances that a consumer accrues after being notified of the rate change."

Also, the companies cannot hike interest rates during the first year after opening an account. They must end the practice of "deferred interest," which means they "cannot retroactively apply interest after advertising a special zero percent. They cannot charge a late fee if the bill was mailed less than 21 days before the due date. Etc.

The big problem is that these new rules will not take effect until July 2010!

The criminal credit card companies are crying in their beer. Omigod, they're going to lose tons of money if they can't cheat their customers! They might lose $12 billion per year! Please let them continue to cheat their customers!

Don't weep for them. They'll find a way to get you! They always do.

Pay all your bills on time! Don't carry a balance! If a company gives you any problem at all, cancel the card. Check your credit report occasionally to see that everything is correct.

It's always best to pay cash, of course. The bastards can't get you, then! Can they?


Jen said...

Thank you so much for this post. You are right on, but I would rather borrow money from a loan shark because at least I know the penalty if I don't pay back-I could loose a limb. Losing a limb is an incentive to pay back. Creditors are not often upfront with the reprucussions and the penalty could be the ability not to get a job or buy a house. In come cases, creditors are worse then loan sharks. I whole heartedly agree!

Jacob said...

Thanks for writing, Jen. Some of us had hoped Congress would make this situation right, and they did, more or less. It appears, though, that the change coming in 2010 won't really do enough; maybe our new Congress can do better.


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