The Quick & Dirty Guide To Beating Credit Card Debt
Peter G. Miller
© Copyright 2010 Peter G. Miller, All Rights Reserved
The Silver Spring Press
Version 2010-0002
Smashwords Edition
About The Author
Peter G. Miller is a nationally syndicated newspaper columnist and the author of seven books, all published originally by Harper & Row (one with a co-author). Unit sales of Mr. Miller's books are well into six figures.
In 1992 Mr. Miller created and began hosting the Real Estate Center with America Online. At the time AOL had roughly 120,000 members and subsequently grew to become the nation's largest Internet service provider. Operated by Mr. Miller for many years, the AOL Real Estate Center is generally regarded as one of the earliest fully-featured real estate sites online, a pioneering effort which hosted more than 40,000 consumer questions and answers, an MLS, a real estate library, online calculators and many other features.
In 1996 Mr. Miller created OurBroker.com. Today OurBroker.com is one of the largest sites providing consumer real estate and mortgage information.
Mr. Miller may be reached by going to the contact page on his site, OurBroker.com.
Notices
The author and the publisher make no representations with respect to the contents hereof and specifically disclaim any implied or express warranties of merchantability or fitness for any particular usage, application, or purpose.
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
Names, characters, places, incidents, and examples throughout this guide are fictitious. Any resemblance to actual persons, living or dead, or to actual places or events is purely coincidental.
Trademarks found in this guide are the property of their respective owners. The term OurBroker® is a registered trademark and the property of the author.
This eBook is one of a series in the Quick and Dirty Books Collection™.
© Copyright 2010 Peter G. Miller, All Rights Reserved. Neither this book nor any part of this book may be published, posted, framed, stored, transmitted or reproduced in whole or in part without the express written permission of the author.
Table of Contents
1 -- How Much Do We Owe?
___ Liability
___ Usury Laws
2 -- How Credit Cards Really Work
3 -- The Monopoly
4 -- Where Credit Card Companies Get Their Money -- And Their Profits
___ Mr. Buffett Loses
5 -- Fees, Lots Of Fees
6 -- Merchant Fees & Hidden Profits
7 -- Who Really Pays for Reward Programs?
8 -- Credit Cards Versus Debit Cards
9 -- Changing The Game -- The CARD Act
___ Phase One: August 20, 2009
___ Phase Two: February 22, 2010
___ Phase Three: August 22, 2010
___ The White House Statement
______ Bans Unfair Rate Increases
______ Bans Unfair Fee Traps
______ Plain Sight /Plain Language Disclosures
______ Accountability
______ Increases penalties
______ Cleans Up Credit Card Practices For Young People at Universities
10 -- How The CARD Act Fails
11 -- Credit Card Fraud
12 -- Debt Elimination Schemes
13 -- A Dozen Ways To Beat The Credit Card Companies
14 -- Get 'Em While They're Hot -- Additional Titles In This Series
1 -- How Much Do We Owe?
Credit has been part of the financial system since someone standing outside a cave first asked for a loan. In the context of the U.S. marketplace, the first general purpose credit card -- a single card that could be accepted by a variety of merchants -- was the Diners Club card introduced in 1950.
Today there are thousands of different credit cards and the debt they represent is enormous. As of December 2009 revolving debt in the United States amounted to $866 billion according to the Federal Reserve.
But not everyone owes thousands of dollars to credit card companies. The average figures don't tell us that some people owe nothing -- or that many people are being eaten alive by enormous mountains of credit card debt, sky-high interest levels and ruinous fees and charges.
"As of 2007," says Consumers Union, "73% of all American households had credit cards and 60% of these households carried a balance. The average balance for households that carried a balance was $7,300, up 30.4% from 2004." (See: Credit Card Facts and Stats, May 12, 2009)
According to the Census Bureau there were 111,162,259 households in the U.S. in 2007. If 73 percent had credit cards that would amount to 81.1 million households. If 60% of the households with credit cards did not pay off their debt at the end of each month -- if they carried a balance -- that would mean that 48.7 million household had credit card debt. The average household, says the Census Bureau, had 2.56 people in 2007. If you divide $7,300 by 2.56 people you get credit card debt of $2,852 per person for each individual in an indebted household.
Unfortunately, when it comes to credit card debt a lot of people are more than average.
2 -- How Credit Cards Really Work
From the gasoline station to the finest luxury hotel, credit cards are used daily by millions of people. They're a convenience, a financial preference for many, an instant medium of exchange when traveling abroad and sometimes a source of emergency cash.
Unlike auto loans or student debt, credit cards are examples of revolving credit. As you pay down the outstanding balance you can borrow again as long as you do not exceed your credit limit.
But credit cards are also something else, a trap for the unwary that can take years to repay -- if it's possible to repay at all.
Unlike a mortgage or auto loan, credit cards are an extension of unsecured credit, meaning that a lender is willing to advance cash on the basis of your credit history and good name. If you don't pay for that trip to Bermuda the credit card lender has no fast and cheap way to get back the money you spent, he can't foreclose on your memories or anything else.
The catch is that credit card debt is enormously difficult to pay off because of high interest rates plus an array of ludicrous and expensive fees and charges. Even bankruptcy may not help: Under the astonishingly one-sided Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, if you spend $500 on credit cards for "luxury goods or services" purchased 90 days before getting relief from a bankruptcy court, the debt cannot be discharged. Ditto if you get a cash advance of $750 or more. Of course, the definition of luxury good or services will depend on whether you're a borrower or a credit card company.
Liability
For the lender each extension of cash is actually a liability. While past financial performance is nice and a good reason to give out credit cards, it doesn't guarantee future credit behavior. The lender doesn't know for certain that you'll repay the debt and the lender must have cash available to fund possible purchases, even if you don't use your cards. It all adds up to some measure of risk.
To offset the additional risk represented by unsecured debt, lenders charge a higher rate of interest than they charge for secured loans such as a mortgage or auto debt. How much higher -- and how additional fees and charges are justified -- is a matter of considerable debate.
In October 2009, the Pew Charitable Trusts surveyed the nation's credit card system and looked at 400 credit cards offered by the 12 largest banks and the 12 largest credit unions. Here's some of what they found:
"The median bank penalty interest rate was 28.99 percent. Most (90 percent) penalty rate increases could continue indefinitely even if the cardholder resumes on-time payments."
"The median credit union penalty interest rate was 17.90 percent. These penalties were less likely to last indefinitely (one-third of penalties would terminate after 3 to 12 months of on-time payments) compared to those of banks."
"99 percent of bank cards included a late fee (median $39)."
"80 percent of bank cards included an overlimit fee (median $39)."
"89 percent of credit union cards included an overlimit fee (median $20)."
"One hundred percent of credit cards from the largest 12 banks used practices deemed 'unfair or deceptive' under Federal Reserve guidelines."
"99.7 percent of bank cards allowed the issuer to raise interest rates on outstanding balances by changing the account agreement unilaterally -- up from 93 percent in December 2008."
"90 percent of bank cards had penalty interest rates that could be triggered by late payments or overlimit transactions. All but 10 percent of these cards had penalty repricing terms that would qualify as 'hair trigger' under Federal Reserve guidelines (triggers of one or two late payments in 12 months)."
"95 percent of bank cards allowed issuers to apply payments in a manner that the Federal Reserve found likely to cause substantial monetary injury to consumers. The other 5 percent did not disclose the issuer’s policy."
"A new trend is emerging as bank issuers move away from fixed rate cards. More cards now feature partially variable interest rates with fixed minimum rate requirements. Rates on these cards will go up when third-party index rates rise but cannot decrease below a fixed minimum set by the issuer."
You have to wonder: If the Pew Charitable Trusts have no trouble finding credit card practices which are unfair and unconscionable why can't the Federal Reserve? And why doesn't the Federal Reserve put an end to such practices?
(For the full report by Nick Bourke and Ardie Hollifield, please see STILL WAITING: “Unfair or Deceptive” Credit Card Practices Continue as Americans Wait for New Reforms to Take Effect.)
Usury Laws
At this point you have to ask, what about usury laws, rules which limit interest rates. Don't many states have usury limits?
Yup, the states have such rules but in Marquette National Bank vs. First of Omaha Service Corp. the Supreme Court ruled in 1978 that federally-regulated banks could ignore state usury laws. Congress, of course, could set a usury limit for national banks but has elected not to do so.
3 -- The Monopoly
Everyone is familiar with the term monopoly. It generally defines a situation where one seller or a small number of sellers control the marketplace. Think of OPEC or a drug company with a patented medicine as examples.
"The industry is dominated by a few major players," says Consumers Union. "Just six companies -- Bank of America, JPMorgan Chase, Citigroup, Capital One, Discover, and American Express -- account for about 90% of all credit card debt."
Do these names seem familiar? They were each major bailout recipients under the government's Bush-era Troubled Asset Relief Program (TARP). Here's how much taxpayer money each company received according to the Treasury Department).
American Express Company: $3,388,890,000.
Bank of America Corporation: $25,000,000,000 ($15,000,000,000 on 10/28/08 and $10,000,000,000 on 1/09/2009).
Capital One Financial Corporation: $3,555,199,000.
Citigroup, Inc: $49,000,000,000 (Treasury in a footnote reports that it "made three separate investments in Citigroup Inc. (Citigroup") under CPP, TIP, and AGP for a total of $49 billion.")
Discover Financial Services: $1,224,558,000.
JPMorgan Chase & Co: $25,000,000,000.
The financial crisis, says the Washington Post, "may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.
"J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show." (See: Banks 'Too Big to Fail' Have Grown Even Bigger, August 28, 2009)
4 -- Where Credit Companies Get Their Money -- And Their Profits
Where do credit card companies get $866 billion to fund credit card debt?
The money comes from a variety of sources, including you. Let me explain:
Each major credit card issuer is actually a federally-regulated bank. As a bank, each institution has the right to borrow funds from and through the Federal Reserve. The federal funds rate is the rate paid by banks when they borrow from one another overnight. The discount rate is the interest level banks pay when they borrow directly from the Federal Reserve. As of late February 2010, the discount rate was .75 percent while the federal funds target range was between .0 percent and .5 percent.
Another big source of credit card money are certificates of deposit (CDs). These are loans made by consumers to banks for a particular period, say 30 days, 6 months or one year. According to Bankaholic.com, in late February 1-year CDs were available from such lenders as Discover Bank (with a rate of 1.69%) and American Express Bank (1.49%). Higher rates are generally available for longer CDs and for CDs in larger amounts.
Credit card lenders also get funding through collateralized debt obligations or C.D.O.s. In basic terms, a C.D.O. works this way: A Wall Street brokerage or bank buys piles of auto loans, credit card debts and student loans. The debts are then used to create a C.D.O.. Investors buy parts of the C.D.O.s and some of the interest from the loans is then paid to the investors. C.D.O. interests can be bought and sold and their value can rise and fall with the worth of their underlying assets -- those consumer debts that throw off interest.
The effect of a C.D.O. is that it allows lenders to get fresh capital by selling their credit card debt to investors. With new capital the lenders can then extend more credit, earn more profits and then sell the next round of debt to financing more C.D.O.s.
This system worked very nicely until investors began to wonder if C.D.O.s were any more secure than residential mortgage-backed securities (RMBS) -- securities backed by home mortgages. In the summer of 2008 Merrill Lynch, now part of the Bank of America, sold C.D.O.s with a face value of $30.6 billion to a subsidiary of Lone Star Funds for $6.7 billion. Did Lone Star actually put up $6.7 billion. Nope. They got financing -- from Merrill Lynch.
Merrill Lynch said it would "provide financing to the purchaser for approximately 75 percent of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction."
Translation: Lone Star bought loans once valued at $30.6 billion for which it paid roughly 25 percent of $6.7 billion in cash -- about $1.68 billion. If something goes wrong, Lone Star's total exposure is the cash it put into the deal.
C.D.O.s had been once been a good business. For instance, the New York Times reported that "from 2003 to 2005, Citigroup more than tripled its issuing of C.D.O.’s, to more than $20 billion from $6.28 billion, and Mr. Maheras, Mr. Barker and others on the C.D.O. team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold -- meaning Citigroup made up to $500 million in fees from the business in 2005 alone." (See: Citigroup Saw No Red Flags Even as It Made Bolder Bets, November 22, 2008)
A fourth source of credit card funding are profits generated from, well, credit card lending. If you have $866 billion at 10 percent interest, and if your cost of funds is 2 percent, you're then producing a gross annual income of $69.28 billion. ($866 billion x 10 percent = $86.6 billion. Less $866 billion x 2 percent = $17.32 billion).
In real life, of course, this example is too simple. The numbers are not real -- a lot of credit cards are funded at less than 2 percent and consumer interest levels are often far more than 10 percent. Also, annual income does not equal annual profits because there are costs to running a credit card operation. For instance, not all borrowers will pay and you have to market your card. Mintel Comperemedia, a service that provides direct marketing competitive intelligence, says issuers sent 180 million credit card offers to US consumers in October 2009.