Credit card practices exploit consumers

Imagine that the interest rate on your auto loan could escalate greatly if you were late on another bill. If that were so, I’m sure more people would pay cash for a hoopty rather than take on a loan with such an outrageous term.

Would you sign a contract with a clause giving the lender the right to charge you interest on an amount you’ve already paid off? I bet you would refuse to sign.

And yet every time you sign up for a credit card, you agree that you are willing to be taken advantage of in exchange for the opportunity to buy now and pay later.

But if the Federal Reserve doesn’t punk out, it will change some of the industry practices governing the way credit card accounts are marketed and managed.

Among proposed regulatory changes under the Federal Trade Commission Act, the Truth in Savings Act and the Truth in Lending Act, banks would be banned from increasing the rate on a pre-existing credit card balance except under limited circumstances.

Credit card issuers would be prohibited from taking any money that customers pay over their minimum monthly payment and applying those funds in a way that maximizes what the company receives in interest charges. That rule change relates to people who have one credit card with balances that carry different interest rates. Currently, if a customer makes a payment above the minimum, those funds are applied to the balance with the lowest interest rate first. That allows the balance carrying the higher rate to pile up interest charges.

The Federal Reserve may also decide to prohibit banks from imposing interest charges using the “two-cycle” method, where interest is calculated on the balance you carry over the previous two months.

If the Fed goes through with the proposed rule changes, banks would be required to provide consumers a reasonable amount of time to make payments.

Consumer advocates have been fighting for changes in the credit card industry for years, but we consumers haven’t made it easy. It’s been hard for advocates to make the case for consumer protection when so many people have been willing to accept outrageous terms because it allowed them to get more credit to buy more stuff.

So why do we accept these business practices that consumer advocates have decried as unfair and deceptive?

It’s because we are greedy. That’s how one of my friends sees it.

“I’m mad at credit card companies for making the rules, but I’m also mad at consumers for accepting them,” he said recently. “There’s no way those terms were fair to anybody — no matter how affluent.”

The Fed wouldn’t have to be imposing these new rules if we weren’t such chumps.

My friend hasn’t used a credit card in years. How many times have you sworn at your credit card issuer for some standard practice and yet still pulled out that plastic to pay for something?

Credit card issuers argue that the way they do business reflects the risks of different consumers. Now that we’re in a recession, many people who had considered themselves model customers are seeing how unfair the credit game is.

If the Fed does make substantial changes to the rules governing the credit card industry, it’s likely that consumers with good credit histories will end up with higher rates.

Ah, but rest assured that the lenders will find a way to continue granting credit and charging whatever the market will bear. This particular market has shown it will bear just about anything for the privilege of paying with plastic.