Save the Big Banks: Screw the Little Guy November 13, 2008
Posted by rogerhollander in Economic Crisis.Tags: Bank of Canada, Bank of Montreal, Bank of Nova Scotia, Canada Banks, canada credit cards, Canada NDP, Canadian Bankers Association, consumer debt, Credit Canada, credit card debt, credit card interest, credit card interest charges, credit card interest rates, economic crisis Canada, interest rate increase, Jack Layton, MasterCard Canada, MasterCard interest rate, roger hollander, Stephen Harper, Visa interest rate
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Rita Trichur
Ann Perry
Business Reporters
Just as the federal government is moving to spend $50 billion more to entice Canadian banks to keep lending, many customers are getting hit with higher credit costs.
For example, Toronto-Dominion Bank – which has skirted the worst of the credit crisis – is the latest lender to toughen up key conditions of its credit card agreements.
The changes, effective Dec. 1, will drive up interest rates for most Visa customers who miss two consecutive minimum payments. Customers who take 30 days beyond the payment due date to make the minimum payment will pay interest at 24.75 per cent, a five percentage point jump.
“The changes align with the pricing practices of our competition,” a TD spokesperson said.
The trend is another headache for struggling consumers like Hayley Moffat. She started racking up credit card debt after she graduated from college five years ago and now finds herself among the many with out-of-control debt loads.
“I just got into the habit of putting everything on credit because I wasn’t making enough money to either buy groceries, or pay my bills, or do all the normal sort of things that I thought you should be doing,” said the 25-year-old funeral director.
“And it just kind of accumulated and it was like a snowball effect over the last few years. I paid it down to a manageable amount, but then life happens, life throws things at you, and then it got back up again.”
Moffat’s debt load became unwieldy about a year ago when her bank cancelled her credit line after it reassessed her creditworthiness, even though she says she had never missed a payment.
She couldn’t pay off the $7,000 balance, so she put it on one of her credit cards, which carried a much higher interest rate. That pushed the balance on her credit card so high the interest charges kept putting her over her credit limit, prompting hefty surcharges on top of her regular monthly payments.
With the help of a credit counsellor, Moffat is now trying to negotiate with creditors to get a handle on her debt, which includes $13,000 on a bank-issued Visa card and $2,000 on a furniture store card.
TD is following in the footsteps of the Bank of Nova Scotia, which revised grace periods and increased fees that apply to its Visa cards. As of May, its “interest-free grace period for new purchases” was reduced from 26 to 21 days.
Last week, Canadian Tire Corp. said it is lowering credit limits for some inactive customers’ credit cards because it is worried some who have tapped out their other credit may turn to Canadian Tire cards.
The tighter credit measures come at a time when the Bank of Canada, which sets rates for loans to financial institutions, has slashed its key rate to just 2.25 per cent in a bid to generally ease debt costs and stimulate the flagging economy.
Bank of Montreal, which issues MasterCard, has not made any changes to cardholder agreements this year. Royal Bank of Canada altered some terms of its Visa cardholder agreements in 2005, a spokesperson said.
Laurie Campbell, executive director of non-profit credit counselling service Credit Canada, said consumer debt loads are out of control.
“We’re seeing lines of credit, mortgages, payday loans, credit cards, absolutely, lots of credit cards. And really people that perhaps got into the housing market that really shouldn’t have gotten into the housing market and then have relied on credit to makes ends meet,” Campbell said. Some people are simply “living on the edge.”
According to the Canadian Bankers Association, there are about 64.1 million Visa and MasterCard cards in circulation in Canada. As of July, there were more than 65 “low-interest” card products with rates of 13.9 per cent or lower on the market. The association also notes 73 per cent of households pay their credit card balance in full each month. That statistic, however, is from 2005.
The Financial Consumer Agency of Canada acknowledged yesterday there is a need to “simplify” credit card documentation.
“Consumers may have trouble reading the fine print in credit card application forms because they find this information too dense,” said commissioner Ursula Menke.
The agency, along with MasterCard Canada, designed a “model plain language application form.” Said Menke: “The next step for both organizations will be to share these findings with members of the industry and encourage them to review their documentation and to consider using some of the best practices outlined in this model.”
During the recent federal election campaign, the NDP vowed to cap credit card interest rates at 5 per cent above prime while banning ATM fees.
NDP Leader Jack Layton again brought up the issue of interest rates in a meeting last night with Prime Minister Stephen Harper.
Layton said he told Harper if the banks and other large corporations are on the receiving end of federal help, consumers deserve something as well.
“There’s all kinds of help being given to companies right now,” Layton said.
“But people are still being gouged with interest rates that are outrageous, with hidden charges.”
- With files from The Canadian Press
Credit Cards: The Plastic Trap October 28, 2008
Posted by rogerhollander in Economic Crisis.Tags: bank credit cards, bank predatory tactics, commercial banks, consumer credit, credit card balances, credit card debt, credit card interest rates, credit card payments, credit cards, deflagration, Economic Crisis, financial bubble, loan default
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23 October 2008
by: Dominique Nora, Le Nouvel Observateur
Some Americans have no choice, Dominique Nora recounts, but to pay $35.50 for a two-week $200 payday loan, an annualized rate of over 468 percent. (Photo: Kevin Steele / Flickr)
“It was too easy.”
After houses, consumer credit? While bankers plug up the breaches created by the mortgage earthquake as best they can, another bubble threatens them: Americans have been living their dreams on credit. And, having overheated up their cards, millions of households will have problems making their payments …
Maria, a housekeeper in a San Francisco clinic, came to the Polk Street Money Mart to borrow $150 (110 Euros) on her October month-end salary. Yet the usurious rate practiced by this boutique is posted in big letters on the wall: $35.50 for $200! But Maria has no choice: “I don’t have anything to buy diapers with for the baby; the fridge is empty …” This young woman who is raising her son alone has already gone through the ceiling of two credit cards: “I’ve got close to a 6,400 Euro balance, while I earn barely 1,400 Euros a month.” In the beginning, Maria used her Bank of America card for exceptional expenses only, such as the pediatrician’s bill. Then she got into the habit of paying the grocery with it … “It was too easy.” Today, she is suffocating. Because in the United States, credit cards are commonly used to borrow. And everything pushes you to repay no more than a minimum amount every month.
Thus do millions of Americans find themselves caught in the “plastic trap.” And experts are predicting a new deflagration. “In fact, there’s a double financial bubble. The real estate credit bubble has exploded … The next will be about consumer credit,” warns Robert Manning, finance professor at the Rochester Institute of Technology, and author of the best-seller, “Credit Card Nation.” The two problems are linked: “Because of the tax advantage, Americans repaid 250 billion Euros of credit card balances with money drawn from real estate between 2001 and 2006,” he explains. “During that period, in defiance of the laws of economic gravity, people’s real income declined … but the price of real estate doubled, which completely distorted their perception of their debt capacity.” The global balance on American credit cards is up to 700 billion Euros. Now that their houses can no longer be used as “cash machines,” and economic activity is slowing down and unemployment rising, what proportion of this debt will turn out to be toxic? In the second quarter of 2008, the national default rate jumped to 7.3 percent. But it seems that that’s only the beginning: according to the firm Innovest Strategic Value Advisors, credit card issuers will have to write off 29 billion Euros of losses this year and 69 billion more in 2009.
The big commercial banks are very exposed: the trio, JPMorgan Chase, Bank of America and Citigroup together have 330 billion in outstandings. On October 6, Bank of America announced a 2.1 billion Euro loss on its credit card division. Meanwhile, Citibank treasurer Gary Crittenden explained that if the economy continued to slow down, “credit card losses could exceed their historic records.” But specialized issuers, such as Capital One and Discover, are even more dependent on this activity (62 percent and 97.8 percent, respectively). And here once again, we’re talking about a cluster bomb. The big issuers have securitized significant portions of their credit card balances and sold them to third parties: speculative funds and pension funds. Investors are holding 260 billion Euros of assets backed by this kind of debt.
The last ten years, for plastic as well as housing, greed eclipsed all common sense. As consumer credit is one of the most profitable banking activities, bankers gave out cards like there was no tomorrow, including cards to high-risk clients. These “rotten” loans could represent as much as a third of the total portfolio, according to the Innovest firm. That ratio could rise to 45 percent among the most reckless issuers, such as Washington Mutual, recently taken over by JPMorgan. It was very difficult for American consumers to resist the Siren call of invasive marketing. Gifts, zero percent interest for a year …: nothing was too much to lure the shopper. Bombarded with solicitations, inundated with emails and harassed by marketing appeals, the “grasshoppers” signed on en masse for new cards. Without – of course – paying attention to the clauses written in microscopic letters stipulating that the bank could increase its interest rates unilaterally. “Good” clients, those with reasonable incomes and credit, found themselves being offered higher ceilings on their outstandings. And why not? Getting into debt, after all, is part of the American culture where health and higher education are ruinously expensive. It’s a proof of optimism. Practically a patriotic duty! Remember that George Bush exhorted his fellow citizens to go out and consume right after the September 11, 2001, attacks … “Advertising and marketing have developed a culture of instant satisfaction of desires,” observes April Lewis-Parks, from the financial counseling firm Consolidated Credit in Florida. “Not only do American parents refuse their children nothing, but they also fail to teach them to live within their means.”
Anxious to exhibit their social success, envious of the neighbors’ standard of living, Americans have confused “desire” and “need.” And they’ve treated themselves to their dreams … on credit. At present, gross domestic product (GDP) is over 73 percent dependent on household consumption and the real savings rate has dropped below one percent. Unheard of since the Great Depression. Excessive consumption has settled in, encouraged by an administration that set a bad example. Governments and regulators found no fault with that. “Since the end of the 1970′s, financial lobbies have taken over Washington. They pushed deregulation and blocked everything that could have constrained their expansion,” recalls Professor Robert Manning.
Like unscrupulous “pushers,” financial establishments consistently and unethically sold their “junk” to the most vulnerable populations: immigrants, seniors, students. For example? Public Interest Research Group has been fighting for years to stop banks’ “predatory” tactics in public universities. “Excessive and costly credit card debt has aggravated students’ problems while they were already penalized by increases in tuition cost,” this association recently testified before Congress. Banks, which maintain open tables on campuses, attract students with free T-shirts, Frisbees, pizzas and sodas. They make agreements with alumni associations and have even signed contracts with several schools, including the University of Illinois. In exchange for royalties, these universities supply them with confidential information about their students.
Today, the return to earth is brutal. Not only are financial establishments soft-pedaling their marketing, but they are also turning the screws on their clients. They are unilaterally lowering borrowing limits and canceling inactive cards. Above all, creditors are severely sanctioning all unmet payment deadlines with heavy late fees or increases in interest rates, which can rise savagely from nine to 24 percent, even 39 percent! That risks aggravating default chances still further.
At New York’s civil court, which handles cases below $25,000 (17,800 Euros), complaints concerning unpaid credit-card balances have tripled since 2000, to constitute nearly half of all cases. Mandated by the banks, debt collection agencies negotiate reductions in outstandings there. There’s the same trend in Florida: “We have 30 percent more calls than last year and people are more distressed,” notes April Lewis-Parks, whose firm advises people who are over-indebted. “On average, clients have five credit cards. Compared to last year, the average level of outstanding debt has tripled to 17,100 Euros. For 12 to 15 percent of them, personal bankruptcy is the best option.”
This augurs poorly for consumption and growth in 2009. “We won’t have any choice: we’ll have to go through a systematic program for the renegotiation of the American consumer’s debts,” predicts Professor Robert Manning, who has developed a method for evaluating repayment capacities. And once this shock has been absorbed? “We can’t act as though nothing happened. We’ll have to reduce our standard of living and reform our growth model.” Will the American “grasshoppers” be capable of rebuilding a more frugal civilization? Of saving? Of investing in infrastructure, research, and education rather than flaming out in immediate consumption? It’s not easy to rethink the American dream.
Translation: Truthout French language editor Leslie Thatcher.
