The Guest Blog

Chadwick: Regulators Need To Help Rescue Consumers

Monday’s Wall Street Journal had an encouraging article regarding Federal Regulators’ putting curbs on interest rates that banks and credit card companies can charge consumers on their balances. This is very good news, and would only be better news if it could be implemented now (rather than mid-2010 as indicated) and if rates could actually be rolled back rather than just not allowed to rise.

In fact, it is surprising to me that there is not more consumer advocacy on the subject of credit card interest rates. They are utterly abusive to consumers while reaping extraordinary profit margins for the lenders.

Credit card debt and the usurious interest rates heaped on top of it are a noose around consumers’ necks and without some drastic realignment of that nearly trillion dollar debt, it will be difficult for the economy to gain forward momentum. According to the Journal, the delinquency rate on credit card debt is 4.9%, and admittedly that will likely rise as the economy heads deeper into the recession now upon us.

The way interest is calculated on credit card balances, anyone who does not pay off their entire balance every month is being subject to a horrific and totally usurious rate. This applies to anyone, not just delinquent card holders, although their rates can get as high as 35%, which is the equivalent of putting them in debtors’ prison. Ironically, one’s credit score – that all important number that bears heavily on one’s mortgage rate, insurance rate and judge of one’s creditworthiness - is advantaged by making only partial payments on monthly credit card balances and is actually disadvantaged when one pays off the entire balance each month, thus depriving the banks and credit companies of profit. What a travesty of justice.

If the banks and credit card companies wanted to act in the best interests of their customers, long ago they would have limited the amount of credit available and would required payment over a defined time. But when the banks can charge 25% or 30% or 35% on outstanding balances and add charges for late payments and over the limit charges, they have little motivation to encourage the consumer to pay off their debt. After a couple of years, all the payments are pure profit, so it doesn’t matter if the card holder defaults.

It is true that companies in a capitalist system are run for their shareholders, but when the interests of the customers are perverted by the interests of the shareholders, the system is broken. It is high time that the regulators step in and come to the rescue of the consumer. This is not to say that consumers are without blame in their lack of discipline regarding wanton purchases over and above their means. But the banks and credit card companies have been totally complicit in this debacle by encouraging irresponsible behavior. It needs to end now.

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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.