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Chadwick: Shame On Capital One Bank

Lately, I have been receiving numerous emails relaying credit card horror stories, in response to my frequent blogs on the subject. But the one I got on Friday takes the cake and I am retelling it because I know the person well who sent it to me, I can vouch for the facts and she has given her permission to share her story. In fact, when she wrote to me, she suggested that I do so.

She is a 20’s something young woman, who graduated from college eight years ago and for the last five years has been working in the financial world – not with a high powered job, just a job with a decent salary and a small bonus, far below $100,000. She has her own apartment and is saving up for a house which she will not buy until she can make at least a 25% down payment.

She mostly uses her debit card when she does not have cash in her wallet (a decision she wisely made after learning the hard lessons of building up too much credit card debt while in college) and she uses her credit card only for special needs. The most recent balance (in February) on her Capital One credit card was $1700, and she has been paying it down at the rate of $500 per month (far higher than the minimum required payment of $50). Because she recently made her last payment on a car she bought five years ago, she has increased her monthly payment to $750. You can do the arithmetic – she will be completely out of debt within three months. She has an impeccable credit record and an extremely high credit rating.

A few days ago, she received a notice in the mail from Capital One informing her that as of April, 2010 the interest rate on her outstanding balance will rise from its current 12.99% to 17.9% (or prime plus 14.69%). Emailing me her story, she wrote, “Shouldn’t they be rewarding their best customers?”

To add insult to injury, a few months ago, she made her monthly credit card payment (online) one day early (That’s right - not one day late, but one day early!!). The following month there was a $40 “late fee” on her statement. When she called to inquire why, she was informed that because she had paid a day early, Capital One had credited the payment to the prior month, and thus determined that she was late on the current month! Imagine having an algorithm in an accounting system that treats early payments as late payments. From my point of view, that is criminally negligent management if not actually criminal behavior. Good for her for examining her monthly statement so carefully. Capital One Bank did remove the charge but only because of her diligence. Based on the complexity of the credit card statements I see, I wouldn’t be surprised if she is in the distinct minority. Which leaves me wondering how much money Capital One and other banks have made falsely charging customers?

The credit card crisis today for Capital One and the many other banks was totally the result of their own mismanagement and greed. For the last twenty years, they have extended credit over and over to credit-unworthy customers, reveling in the exorbitant and usurious rates they could charge, and turning the credit card business into the richest source of profits for the bank holding company.

Today the tables are turned. Those credit-unworthy customers are drowning in the 25% and 30% and higher interest rates accruing endlessly on their credit cards, and the delinquency rate is growing and soon will soar and the banks are scared. The senior managements of the banks know how serious the problem is. In fact, Ken Lewis, CEO of Bank of America , said as much less than a month ago in his testimony before The House of Representatives on February 11, when he admitted that it will be a “terrible year” for the credit card industry. And John Mack, CEO of Morgan Stanley , on that same day said that he hoped there was a way to lower interest rates on credit card debt.

So what is the solution being employed by the banks? They are trying to rescue their bad business decisions on the backs of their best customers. And unfortunately they can do that because they wrote the contracts that every customer must sign before being issued a credit card. That is capitalism gone amuck and a policy that will ultimately reap serious economic harm.

Senators and Representatives in Congress, wake up to what is happening to the people you represent.

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Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.