Avoiding Credit-Card Lending Traps

What happens when credit card companies sell accounts?

Many posts on our two debt boards have to do with credit cards, and for good reason.

People have either gotten caught in the credit-card trap or gotten wise to it and are paying in full, meaning the companies make no interest on their accounts. In either event, the credit card companies are getting squeezed. Profit margins are down, and guess who's paying the piper: You are.

One way consumers pay comes when a credit card company sells its accounts to another company.

Here's how it works. You get a letter from your Pittsburgh-based bank announcing a teaser rate of 5.9 percent, and you jump on it. When that expires, six months or so down the line, the interest rate jumps to 14.4 percent. Let's say eventually it settles down to 12.5 percent. You're satisfied; "This could be worse," you tell yourself.

Account switching

Then one day it is worse. Surprise! You find you're no longer a customer of the Pittsburgh-based bank you started out with; a bank in Oklahoma you never heard of now owns you. And it's jacked up your interest rate to 20.74 percent.

Take it or leave it; those are the terms. Tens of millions of Americans have been facing that choice. But here's the kicker: if you decide to leave it, you still have to pay the new interest rate on whatever debt gets carried over from your original bank. Thus, if you were paying 12 percent on a balance of $2,500 dollars, you're now required to pay 20 percent on it -- even if you didn't choose this deal.

The new outfit can also shorten the time for making payments without interest charges, eliminate grace periods for payments received a few days late and raise penalties for late payment, now commonly as much as $29.

"Scandalous" treatment

Gerri Detweiler, a consultant to Debt Counselors of America, says the way consumers are treated by the credit card companies is scandalous. If your car or mortgage loan gets sold, your interest rate stays the same. Not so with credit cards.

Stephen Brobeck, executive director of the Consumer Federation of America, calls it gouging when a credit-card rate is pumped up for no reason other than a business deal between large institutions.

I'll say.

Is there any light at the end of this story?

Possibly. Credit-card lending has gotten so out of hand that a backlash is taking shape, reflected in congressional efforts to curb, if not halt, abusive credit-card terms. John LaFalce of the House Banking Committee is trying to get legislation through that, among other things, would give consumers hit with higher interest rates the right to pay off balances at the original terms.

In the meantime, consider this a cautionary tale. Read the fine print. Call up and negotiate with them, if you're able. Best of all, if possible, have nothing to do with them.

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