“Secrets“ about the US credit card business
By: Rechtsanwalt (Attorney) Carsten Lexa, LL.M.
I´m not sure whether the following are really “secrets”. Very likely they are not. But they are definitely not commonly known – even to US-Americans, who use, on average, about 8 credit cards per person. Especially the Germans always wonder about the problems the US-Americans have with credit cards and how it is possible that a lot of them struggle with repaying their credit card depts. Well, a lot of the following was new to me and, especially from a legal perspective, it really surprised me.
1. Credit card banks can raise the interest rate automatically if someone is late on payments – but not only on payments for the credit card, but even if someone is late on payments elsewhere, for example another credit card or on a phone, car, or house payment. This practice is called “universal default” and such a clause is becoming increasingly popular in credit card agreements.
The logic behind the practice of universal default is that the credit card bank is not being unreasonable in raising rates when it has reason to believe that the risk of being repaid by the customer has increased.
2. Almost every US-American has, often unknown to them, a credit score known as FICO score. It is used to determine how much someone can borrow, or how much he has to pay for life insurance, or if someone can rent a home. Most importantly, it can be a factor in determining the interest rate someone pays on a credit card. The FICO score is usually determined by five factors, with the most important being the amount someone currently owes and the payment history on large debts.
3. In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted the existing restrictions on late penalty fees. Back then, fees ran to $5 or $10, and usually did not exceed $15. After the Court’s decision, fees soared, reaching upwards of $30. The result of the decision is that there is no limit on the amount a credit card company can charge a cardholder for being even an hour late with a payment. Since that decision, the amount of revenue the credit card companies generate from fees (including late charges, over-the-limit fees, and charges for returned checks) has doubled.
4. Most people, not just US-Americans, do not read the fine print on their credit card agreement. But this is where the interesting clauses can be found. Very often a clause says that the credit card company can change the interest rate (APR) at any time, for any reason, as long as they give 15 days’ or 30 days´ notice.
5. There is no federal limit on the interest rate a credit card company can charge their customers. The Federal Government of the United States once had national laws that set a cap on the amount of interest that could be charged on a loan. But after the Great Depression, it repealed them and some states put no new laws in place. Deleware and South Dakota for example have no caps on interest rates. But can credit card companies chartered in these states charge to customers whatever interest rate they? Yes, they can. This goes back to the 1978 Supreme Court decision Marquette National Bank v. First of Omaha Service Corp. that determined national banks only have to obey the interest-rate caps of the state they are chartered in, not that of the state where a bank’s customer lives. This means that when a bank from a state without limits on interest, like Delaware or South Dakota, issues credit cards to people living in states like Minnesota, which caps credit card interest, the customer can be charged any rate of interest. The result is that cardholders often have interest rates of 20% or more.
6. A lot of US-Americans pay only the required minimum – often as low as 2 percent – of their balance each month. Many of them could pay more than the minimum, and could possibly even pay off in full their balance. But they don’t — even though the interest rate they are paying on their credit card balance is considerably higher than what they pay on other things and compared to what they’re getting in interest income from their savings account.
It should be noted that things have changed a little bit regarding the required minimum monthly payments of 2% mentioned above. Banks are being required to increase minimum monthly payments to cover all fees and interest incurred during the month as well as covering at least 1% of the principal on the loan.
For inquiries please contact the author: kontakt@kanzlei-lexa.de
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