Hundred Power

That’s what the Congress did this past week. And, Senator Bernie Sanders used those exact words to describe the credit card bill. The bill does almost nothing except require that a credit card company give you a little advance notice before they pick your bank account. The card issuer still gets to decide when it wants to jerk you around by raising the interest rate on your existing balance. Where’s the remotely fair deal for the customer?

Noting that one-third of credit card holder’s pay interest rates higher than 20% and up to 41%, Sanders said, “They are engaged in loan-sharking.” This next one-line quote has become part of American folklore. It is apparently incorrectly attributed to Albert Einstein. It is nevertheless something to remember at all times:

    The most powerful force in the universe is compound interest.

Also, don’t forget the handy rule of 72. If you pay an interest rate of 36%, divide 72 by 36. The answer is 2 years. That’s how long it takes for your debt to double. Imagine a typical household owing and simply continuing an average balance of $10,000. After 2 years, they owe $20,000. Now that’s the power of compound interest. That doesn’t even count late fees and penalties. Anything close to a 36% interest used to be called usury, and it was absolutely illegal in most states.

So, credit card companies want the laws to enable them to do darned well what they please. Now let’s turn the tables upside down so that you the borrower can be protected from the corporate gouging. Oh, by the way, this solution is very fair and even-handed to the credit card companies. To simply cut to the chase, here’s a simple set of rules.

• Cap the interest rate.
• Require one interest rate.
• Require a fixed term.
• Ban retroactive rate changes.
• Eliminate all late fees.

Let’s explain by example under such a new, fair law for fair dealing. First, let’s set a maximum rate. Sanders said credit unions may not charge more than 15% under current law. But, let’s be overly-generous and say 18% at the most. So the credit card company can offer any lower rate for the life of the card, i.e. the term. Requiring a term would be like setting the length of a mortgage. That would be all we need to know about this
credit card. The credit card company might choose to offer you, and a whole lot of of other propects, a new card with a $2,500 limit for 2 years at a rate of 14%. That would mean that you could utilize that card as you see fit. If you’re late on a monthly payment, or miss the payment entirely, there would be no late fee and no penalty. You’d just have to pay the stated interest on a higher balance. At the worst, if permitted under this new set of laws and rules, the unused credit might be reduced without notice, at the option of the issuer.

The example is an attempt to describe an even-handed approach to these unsecured
loans. Right now under the corporate regime in the Congress, you and I are still at the mercy of the whims and greed of the credit companies. Is this ‘new’ proposal fair to all? What do you think? Please post your opinion using the “Comment” option below.

Click here to contact your representatives in Washington, D.C.:
Our Elected Officials. Tell them you want
common-sense consumer protection.

– Byron

References:

Donna Rosato, Money.CNN.com, May 18, 2009.

Credit Card Reform: What Might Have Been.