THE NATION
Credit Card Firms Won as Users Lost
They sought new laws but found ways to make money even on people who went bankrupt.
March 4, 2005
LA Times
By Peter G. Gosselin
Times Staff Writer
WASHINGTON -- In the eight years since they began pressing for the
tough bankruptcy bill being debated in the Senate, America's big
credit card companies have effectively inoculated themselves from many
of the problems that sparked their call for the measure.
By charging customers different interest rates depending on how likely
they are to repay their debts and by adding substantial fees for an
array of items such as late payments and foreign currency
transactions, the major card companies have managed to keep their
profits rising steadily even as personal bankruptcies have soared,
industry figures show.
As a result, while they continue to press for legislation that would
make it harder for individuals to declare bankruptcy, the companies
have found ways to make money even on cardholders who eventually go
broke.
At the same time, under the companies' new systems, many cardholders
-- especially low-income users -- have ended up on a financial
treadmill, required to make ever-larger monthly payments to keep their
credit card balances from rising and to avoid insolvency.
"Most of the credit cards that end up in bankruptcy proceedings have
already made a profit for the companies that issued them," said Robert
R. Weed, a Virginia bankruptcy lawyer and onetime aide to former
Republican House Speaker Newt Gingrich.
"That's because people are paying so many fees that they've already
paid more than was originally borrowed," he said.
<snip>
"The bottom line is that there are people out there who are able to
pay their bills who are not paying," said Tracey Mills, a spokeswoman
for the American Bankers Assn., which represents most of the major
credit card companies.
But consumer advocates, many academics and some judges and court
officials argue that the bill would sharply reduce the number of
Americans able to file for bankruptcy, even in instances where doing
so would buy them time to repay their debts.
The critics argue that people unable to file would be at the mercy of
increasingly aggressive efforts by lenders -- especially credit card
companies -- to raise fees and boost collections.
People like Josephine McCarthy, for instance, a 71-year-old secretary
at the Salem Baptist Church, less than a mile from where the Senate
bill is being debating.
According to papers in her recent bankruptcy, McCarthy discovered at
about the time of her husband's death in 2003 that the couple had a
$4,888 balance on a Providian Financial Corp. Visa card and another
$2,020 balance on a Providian Mastercard.
Over the two years from 2002 until early 2004, when she filed for
bankruptcy, McCarthy charged an additional $218 on the first card and
made more than $3,000 in payments, the court papers show. But instead
of her balance going down, finance charges -- at what the bankruptcy
judge termed a "whopping" 29.99% rate, together with late fees,
over-limit fees and phone payments fees -- pushed what she owed up to
more than $5,350.
In the case of the second card, the papers show that McCarthy charged
an extra $203 and made more than $2,000 in payments, but again fees
and finance charges pushed the balance up.
<snip>
Credit card companies have come in for harsh criticism in recent years
for their penalty fees and the "risk-based pricing" under which they
charge customers different interest rates depending on their credit
histories and their likelihood of paying.
Consumer advocates have accused firms of not adequately disclosing
such controversial practices as universal default, when a company can
jack up a cardholder's annual percentage rate, often to more than 30%,
based on the cardholder's performance with another creditor, not the
card company.
Regulators and law enforcement officials have accused companies of
deceptive practices. In 2000, the U.S. Office of the Comptroller of
the Currency and the San Francisco district attorney's office ordered
Providian to pay $300 million in restitution after customers
complained that the company didn't credit their payments on time and
then imposed late fees.
A stream of court cases involving credit card companies has produced
public outrage in various parts of the country.
In Cleveland, a municipal court judge tossed out a case that Discover
Bank brought against one of its cardholders after examining the
woman's credit card bill.
According to court papers, Ruth M. Owens, a 53-year-old disabled
woman, paid the company $3,492 over six years on a $1,963 debt only to
find that late fees and finance charges had more than doubled the size
of her remaining balance to $5,564.
When the firm took her to court to collect, she wrote the judge a note
saying, "I would like to inform you that I have no money to make
payments. I am on Social Security Disability.... If my situation was
different I would pay. I just don't have it. I'm sorry."
Judge Robert Triozzi ruled that Owens didn't have to pay, saying she
had "clearly been the victim of [Discover's] unreasonable,
unconscionable and unjust business practices."
Efforts to reach Owens were unsuccessful. A spokeswoman for Discover
said she could not comment on the case.
Analysts said that lost in the uproar over particular practices and
cases is the fact that the credit card industry has almost completely
remade itself in the years since it began pushing for passage of the
bankruptcy bill -- a makeover that has left some analysts wondering
why the industry needs the changes in bankruptcy law.
"The idea that companies are losing their shirts on bankruptcies is a
lot of bull," said Robert B. McKinley, chief executive of CardWeb.com,
a Frederick, Md., consulting group that tracks the credit card
industry. "With these rates and fees, the card industry is a gravy
train right now."
<end excerpt>