In Poultney, Vt., a small town near Lake St. Catherine near the Vermont-New York border, "Walter" had been running a small business during the summer for 43 years—until a rectangular piece of plastic helped bring him down.
Walter, as he referred to himself in a letter to Vermont Sen. Bernie Sanders, had been using a credit card from Advanta, a Pennsylvania-based company that specializes in small-business credit cards. The rate had been 7.9 percent for years, he wrote. But last year, for no apparent reason, the rate jumped to 28.8 percent.
"I always paid more than the minimum and always on time," Walter wrote. "When Avanta was contacted and asked why, I was told it's a floating interest. I asked to speak to a manager and was advised that's the way it was and they could do nothing to lower it. I got a line of credit loan from Heritage credit union at 1 percent over prime, paid them off and shut down my business. After 43 years of business, it took usury to shut me down."
There are dozens of stories like this one in a booklet Sender's office prepared based on letters he received from constituents socked with high credit card rates, often even though they conscientiously paid their bills on time and maintained high credit ratings.
As Sanders puts it in the introduction to the booklet, "In my view, when credit card companies charge 25 or 30 percent interest rates they are not engaged in the business of 'making credit available' to their customers. They are involved in extortion and loan-sharking." These stories, he says, make the case for "fundamental reform of the industry."
Next week, the Senate has an opportunity to restore some fairness to a credit-card industry that is out of control. In the process, Democrats can show that they are not owned by the financial services industry—a test 12 Democratic senators failed when they sided with lenders instead of homeowners and defeated a mortgage relief bill.
The Senate will take up a bill (S 414) sponsored by Sen. Christopher J. Dodd, D-Conn. that has earned praise from several consumer and public-interest groups. If it is not watered down during Senate debate, will institute some important reforms.
The version of the bill that left committee would prevent credit-card issuers from:
- Raising interest rates capriciously and retroactively on existing balances.
- Hitting consumers with high penalty fees, such as over-limit fees and telephone payment charges, that are not related to the costs that credit card companies incur.
- Assessing hidden and unjustified interest charges on balances already paid off.
- Forcing consumers to pay off balances with lower interest rates before those with higher rates.
- Offering credit to students and young consumers without considering their ability to repay
- the loan.
It left the Senate Banking Committee stronger than a House bill passed in April that the banking industry is still hell-bent on opposing, even though its lobbyists successfully diluted portions of it. But since then Dodd has been negotiating with Sen. Richard Shelby, R-Ala., on compromise bill language to head off a Republican filibuster.
The Senate should get the message that there is nothing to compromise, especially when the top credit-card issuers (who also happen to be the biggest offenders when it comes to unscrupulous lending practices) also are surviving off of taxpayer bailout money.
As Elizabeth Warren, chairwoman of the Congressional Oversight Panel that is watchdogging the federal bailout, told the Wall Street Journal, "we're asking taxpayers to pay twice" when we subsidize the operations of these banks so that they can turn around and fleece their customers with new and excessive fees and interest charges.
A truly fair and just piece of legislation would designate interest rates that go as high as 30 percent or more "usury" and make the practice of usury illegal. Before conservatives started deregulating the credit-card industry in the 1980s, usury laws set reasonable limits on the interest rates lenders could charge. Banks made profits, and responsible borrowers who had a temporary setback weren't dumped into a hole they could not dig themselves out of because of a predatory pile-on of interest-rate hikes and fees.
Sanders has introduced a bill that will set a cap of 15 percent on the interest credit-card companies can charge. At a time when banks are getting virtually no-cost loans from the Federal Reserve and from each other—the one-month London interbank loan rate is 0.4 percent—asking banks to limit themselves to at 14.6 percentage-point spread between the cost they pay and what they charge borrowers is not too much to ask.
But the very least that the Senate can do is tell the banks to end the loan-sharking and extortion. Consumers Union has launched a website, CreditCardReform.org, that will enable you to send that message before the Senate acts next week.
