Consumers or Banks: Which Way Will Pataki Go?
Cross-default clauses are those nasty little traps that credit card companies figured out they could use to boost profits. The idea is devilishly simple: A customer who has been making payments faithfully to Providian, for example, may get into an argument and refuse to pay her phone provider. BAM! Providian ups its 9.9% interest to 29.9%, raking in the profits—and wrecking havoc with the customer’s budget. Welcome to cross-default clauses.
Now the New York legislature has passed a bill to ban the practice. It goes to Governor George Pataki’s desk for signing on August 8. Which way will the governor go—for the customers who get bitten by this practice, or for the big-time credit card companies that scoop up the profits from it?
Keep in mind that cross-default clauses are used to raise interest rates on people who have carefully abided by every term of their agreement—payments on time, staying with limits on the balance, etc. So far, they haven’t cost this lender a dime. Their problem was with some other business.
Using cross-default clauses, credit card companies can do the consumer equivalent of starting a run on the bank. Once one bank uses a cross default clause, the other banks realize that 1) because payments have suddenly gone up, the borrower is more likely to fail eventually, and 2) the competitor using the cross-default clause is going to sop up more of the borrower’s available cash right up until the borrower collapses. That means if Providian uses the practice, surely MBNA thinks it needs to use it too.
By outlawing the clause, New York state does two remarkable things: First, it passes some good consumer protection legislation that will make a meaningful difference for a lot of families. Second, it will put credit card companies on notice that some states have the political will to protect families ahead of card companies. Hats off to Bronx Assemblyman Peter Rivera and to a majority of the folks in Albany.
But the bill isn’t law yet. New Yorkers should be talking with their Governor. The rest of us should be watching: Will he or won’t he?
The practice you are referring to as "cross default" is one I know by the name "universal default" or "universal review." Whatever you call it, does it do any good to pass a law in NY to ban the practice when all contracts per the Supreme Court (SCOTUS) many years ago are governed by the state in the contract? In other words, because credit card contracts are always governed by the law of Delaware, South Dakota, Nevada, Arizona or wherever, does it matter what New York does?
What we need is a national law to govern abusive practices by lenders.
Another one that I am steamed about is the fact that credit card companies are allowed to charge 24 months of interest on 12 months. This is called in your credit card agreement as a "two-month billing cycle." I found that out this month that even though I paid by bill in full (one I even overpaid) I was still charged interest. I suppose that even next month I will be charged the minimum interest of $2.00 because there will be an "averaged" balance over the two month (even though I will have paid the balance in full). This is another abusive practice that I suspect very few people know about. Effectively, this doubles the stated interest rate.
I suspect state laws will be completely useless as the SCOTUS will find that the contract is governed by the credit card "agreement."
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July 18, 2006 6:40 AM | Reply | Permalink