The next step in the growing financial squeeze—what the banking community likes to call the "soft landing"—is coming down in credit cards. Take a look at those offers you're getting in the mail. Gone are the promises of permanent low APRs on purchases or balance transfers. Instead, the companies are offering a low rate for 6 or maybe 12 months, and then it shoots up to 15 or 20 percent or higher. And there's usually a 5 percent transfer fee on your whole balance—the ceilings on transfer fees are disappearing. So even if you get, say, a 4.9 percent APR for 12 months, it's really 9.9 percent.
This week, the Senate Homeland Security and Governmental Affairs Subcommittee, chaired by Michigan's Carl Levin, held hearings with representatives of several large credit card lenders on an even more devious practice: Consumers whose credit scores fall even slightly—due to a single late payment, or a problem that has nothing to do with their credit cards—can have their APRs jacked up without warning. The credit card companies can even apply this high interest rate retroactively to already accumulated debt.
"Interest rates are going up, low teaser rates are disappearing, and the credit squeeze is going to get a lot tighter," Elizabeth Warren, the Harvard law professor and expert on credit card debt and personal bankruptcy, told Mother Jones this morning. She is an advisor to the campaign of John Edwards, who has made an issue of predatory lending practices and proposed a commission to regulate credit card rates.
What happens, I asked Warren, when people struggling to pay their mortgages go deep into credit card debt, and then can't pay? Do the credit card companies get to take their assets, including their homes? "Here's the deal: A credit card company can't seize your bank account or grab your car without going to court,'' she said. "BUT most credit card companies have put arbitration clauses into the fine print of your agreement, so they can go to arbitration, where they know the arbitrators and where they win more than percent of the time. They then take the arbitration award to a court and get a judgment on it, and the consumer can't do anything about it. If the arbitration was unfair, that's too bad—the credit card company wins. It is a scandal." (For another angle on this little-known scam, see my colleague Stephanie Mencimer's recent piece on car loans.)
Warren continues, "Alternatively, credit card companies can go directly to court and they often get a default judgment because the customer didn't receive adequate notice, didn't understand what the notice said, couldn't appear at that time, etc. Many credit card companies have figured out how to turn the court system into a cheap tool to collect from people in financial trouble.'"
So as the subprime crisis deepens, this other crisis is just waiting in the wings. And the new bankruptcy law passed in 2005 serves the interests of credit card companies and other lenders while screwing consumers in additional ways, leaving them no way out of the debt trap.