The truth about the lending industry in America is slowly coming to light, through movies like Maxed Out and In Debt We Trust, Senate hearings on predatory lending practices in the mortgage industry and on the effectiveness of credit card disclosures, and through recent media programming, including 20/20, PBS NOW, and other popular television and radio shows.
Yesterday, Harvard Law Professor Elizabeth Warren, an expert in bankruptcy and credit law, was interviewed on NPR's Fresh Air. Warren warned that the "basic model" for pricing credit cards was now to have separate tiers that would allow putting a credit card in the hands of every "man, woman and child" who might use it.
She points out that the merchant discount fee alone, which nets the credit card companies a couple of pennies on every dollar spent on credit cards, adds up to about $21 billion annually.
However, Warren says the real way they make their money, the "sweet spot", is the people who will get into trouble with credit cards and end up paying late fees, over the limit fees, and default interest rates. According to Warren, that's where the credit card companies make their real money.
Last year, credit card companies sent out 8 billion pre-approved credit card solicitations.
Although those applications put a low interest rate right up front in bold print, but buried in the fine print are provisions that allow the credit card company to change those rates-and those changes aren't likely to be in the consumer's favor.
The typical contract specifies a variety of possible reasons that interest rates may change, complete with confusing calculations, but the real power is in the catch-all "reserves the right to change the terms at any time for any reason", or similar language.Speak to a Bankruptcy Lawyer Today
The fee portion of credit card revenues has been the "fast growing part" since about 2000. Professor Warren cited examples of credit card companies imposing an across-the-board fee and then removing it for any customer who called to complain, arranging payment centers so as to delay arrival of payments and trigger late charges, even delaying opening payments.
She also suggested that the credit card companies count on the fact that many people will give up if something doesn't get fixed during the first call, if they leave you on hold for a certain amount of time, etc.
Unfortunately, many Americans do just that, or assume that they were too slow in mailing a payment or made an error when late fees and other charges show up on their statements.
Credit cards can be a tremendous convenience in today's world, but they require constant vigilance. According to Elizabeth Warren, even the smartest of us are "paying for the privilege"-and that's okay.
Credit card companies, like every other private business, are out there to make money. The key is to make sure that you know just how much you're paying for the privilege, and that you're quick to notice and take action when you're paying for something more.
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