BANKS AND CREDIT CARDS

BANKS AND CREDIT CARDS.

There is not a day goes by that the newspapers, radio and television are bombarding us with news regarding banks and the trouble they are in. Then we hear that they made zillions of dollars in profit. What are we to believe? The TARP money was given to the banks to loan out to consumers to get the economy going. What they did was park the money with the Federal Reserve at a 2% interest rate and then took it back at a profit. Some of them paid it back to the government so they can be free of the rules, and now they are free to mess up the economy all over again.

The other day something caught my ear listening to the radio while driving to work. The news was that the banks are losing money on credit cards, so there will be another problem to look us in the face again. Then I remembered the mailings we have all been receiving from our banks/credit card companies that they have reduced our line of credit and increased our interest rates to almost 30%.

I would be glad to tell them why they are losing money and how to solve it. Let's create an imaginary credit card where we have a balance of $4,825.00 and our current rate is 12% with credit limit of $10,000.00. We have been making payments on time and have never been late. This balance would have a minimum payment requirement of the current month’s interest for $48.25. Now let’s assume we are to pay an additional $50.00 toward the principle so our payment would total $98.25. This is something that we have budgeted for and we could keep up with.

Then we get the love letter from our bank and they decrease our credit limit to $8,000.00 and increase our interest rate to 28%. Now we have less access to the cash that we all need in this NO-BANK/CREDIT WORLD and our payments are changed.

Now your monthly interest increases to $112.58 and that alone is more than what you have in your budget to pay for the monthly payment. You have been budgeting and paying $98.25 per month and now interest alone is $112.58 which is $14.33 more that what you have been paying for both interest and principle.

This is what happens: People take a look and recognize that at this rate all they are paying is less than amount of the current monthly interest charge. Since this credit card will never get paid off, they completely stop paying, and this account becomes a bad debt for the banks. Banks have not woken up yet to realize that instead of helping people in this economy and in turn helping the economy turn around, their institutions have created another stupid situation that is worse than the prime loan episode…and they are wondering why they are losing money on their credit card business. Duh! Wake up you smart Harvard Graduate Geniuses who are trying to find the next scheme to make money. It does not take a rocket scientist to see this, but these people in charge are so smart that they have gone blind to realty. I am surprised that none of them have thought of opening a new bank called Capone Bank. At least Al Capone did you in if you did not pay rather than torture you to death.

If they would reduce the interest rate rather than increase it, more people would pay their credit card payments, and this would place more money in the banks. They would have more money to lend rather than steal TARP money to make money on us. Now back to our imaginary credit card situation. If they reduce the interest rate to 7%, we would all pay less interest and our payment would be $25.14 interest and let’s say we pay the $50.00 we have been paying toward the principle. This would make our total payment $75.14. What happens is from original total payment of $98.25 to $75.14, we have an extra $23.11 to spend which we would put in the economy to get it back on its feet. I know $23.11 does not look like very much money, but if this multiplied by the millions of open credit card accounts, we’re talking real money on a monthly basis. Let’s look at the statistics listed below for 2008. There was total of 798.55 Billion Dollar credit card debt balance. If the 5% reduction in the interest rate is applied to this amount, we would have a savings of 39.93 Billion Dollars for the consumers, which would be spent in the economy and give it a good start to recovery.

However, the banks’ greed will not let them do this. You think the politician will do it? Their campaigns are financed by banks and they are in the bank pockets as well. It is time for the public to bring it up and ask questions. We need to ask why are they doing this, and let them know that we know what they are doing.


EXISTING TERMS
BALANCE INTEREST RATE MONTH INTEREST ADD PYMT. TOTAL PYT. CREDIT LIMIT
$4,825.00 12% $48.25 $50.00 $98.25 $10,000.00
NEW TERMS
$4,825.00 28% $112.58 $0.00 $112.58 $8,000.00

$4,825.00 7% $25.14 $50.00 $75.14 $8,000.00

CREDIT CARD ISSUER STATISTICS
Market share
Top 15 issuers of general purpose credit cards for 2008 based on outstanding balances:
1. Chase - $183.32 billion
2. Bank of America - $166.32 billion
3. Citi - $106.74 billion
4. American Express - $88.02 billion
5. Capital One - $60.08 billion
6. Discover - $49.69 billion
7. Wells Fargo - $36.36 billion
8. HSBC - $29.97 billion
9. US Bank - $18.53 billion
10. USAA - $17.48 billion
11. Barclays - $11 billion
12. Target - $8.65 billion
13. GE Money - $7.51 billion
14. Advanta - $5.02 billion
15. First National - $4.93 billion
(Source: Nilson Report, March 2009)
This morning I was reading the business section of my newspaper, and the main article was titled “Fixed Rate Cards Topple”. As though we didn’t have enough problems with the Credit Card companies being allowed to go rampant with our money, now it looks like we can kiss the fixed-rate credit cards goodbye! Bank of America and Chase stated they would be “switching some fixed-rate cards to variable rates to ‘manage costs’ in light of the sweeping new reforms to the credit card industry.” The interest rate will be tied to the rise and fall of the prime rate, and it will start in August for both banks. How is the consumer supposed to “manage” his money when his monthly payment will change on a monthly basis?

When the government told the credit card companies that there had to be limits on how much they could charge for interest, rules put in place for how many times a credit card could change it’s payment due date, etc, the credit card companies were given almost 2 years to “get ready” for these changes. How long is the notice that they are giving the card holders for this latest fiasco? Today’s paper is dated 7-20-09. August 1st is 11 days away. Card holders have no chance to pay off any existing charges on their cards in 11 days to avoid the higher interest rates, and the banks are well aware of this. Again, the consumer is the victim here, and there is no one to rescue them.