Where the money goes
The Washington Post has taken this moment, when Congress stands ready to end its 8 year push to reform the bankruptcy code to protect banks and credit card companies by actually passing the legislation, to highlight one of the key factors that lead people to bankruptcy: Outrageous penalties and interest charges on credit cards:
Despite, or perhaps because of, the large increase in cards, there is a “fee feeding frenzy,” among credit card issuers, said Robert McKinley, Cardweb’s president and chief executive. “The whole mentality has really changed over the last several years,” with the industry imposing fees and increasing interest rates if a single payment is late.
Penalty interest rates usually are about 30 percent, with some as high as 40 percent, while late fees now often are $39 a month, and over-limit fees, about $35, McKinley said. “If you drag that out for a year, it could be very damaging,” he said. “Late and over-limit fees alone can easily rack up $900 in fees, and a 30 percent interest rate on a $3,000 balance can add another $1,000, so you could go from $2,000 to $5,000 in just one year if you fail to make payments.”
According to R.K. Hammer Investment Bankers, a California credit card consulting firm, banks collected $14.8 billion in penalty fees last year, or 10.9 percent of revenue, up from $10.7 billion, or 9 percent of revenue, in 2002, the first year the firm began to track penalty fees.
Link.
Instead of making it harder for people to get out of the spiraling vortex of debt (many people who I work with have paid their actual purchases on their cards off over time, but still face the same or much greater balance on their cards), Congress could consider fixing the usury laws: Currently, there is no real federal limit on the amount of interest that can be charged by a lender, and limits in state laws are preempted for most credit cards by federal law. So the sky is the limit.
