Usurious Credit Cards the Next Credit Crunch

By Scot Herrick | Personal Finance

Aug 22

Have you been reading about the credit implosion in the mortgage (and other) markets? It’s going downhill fast, and it’s bad.

No problem for you, though, right? Certainly not for me — I don’t have any of those weird mortgages to worry about.

But the credit cards…now there’s a different story. Because everyone is expecting credit card defaults to also go up, credit card companies are getting ready to make a killing.

Coming to a mailbox near you: revisions to your credit card agreement. And if you got one like mine in the mail, you’ll be a little stunned by the revisions.

Mine include some wonderful changes to the agreement:

We are increasing the non-promotional Annual Percentage Rate for new Check Cash Advances, Direct Deposits, and Cash Equivalents. These transactions will be subject to the variable APR….of 24.99%.

We may increase the Annual Percentage Rates on all new (balances), without giving you notice, each time you have two “default re-pricing events” in any twelve month rolling consecutive billing cycles…Default Rates are variable rates calculated using the Variable Default Rate formula with a margin (margin!!) of 23.99 percentage points; as of July 31, 2007, this results in a corresponding APR of 32.24%.

(The variable rate calculation is now an index). This index is determined on the last business day of each month and is the highest US Prime Rate …(source)… at any time within the immediately preceding three months.

(Fees changed for transactions) Effective March 10, 2008, we are increasing (sic) transaction fee to 3% of the US dollar amount of each (with a minimum of $10 and NO maximum fee).

I’ve had this particular credit card since about 1980. Of course, Bank of America bought MBNA and that explains a lot.

But, 25% interest on a balance? And 32.24% if you miss two payments with a margin of 23%?

I never miss payments (and have a FICO of 800), but this is pretty unreal.

So pay those credit cards down fast — and read those statement updates carefully.

In mine, I have the opportunity to opt out of the “default” change if I go through hoops in writing to the company, which I will do. Not that I’d default, but why would I agree to let them do this if I have the option of not taking the usury rate?

Wow.

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About the Author

Scot Herrick is the author of “I’ve Landed My Dream Job–Now What???” and owner of Cube Rules, LLC. Scot has a long history of management and individual contribution in multiple Fortune 100 corporations.