“Fee-based company” targets “scum of the earth”: one credit card company’s business model
ABC News tells the story (watch here) of how a credit card company’s predatory practices stifled one young woman’s plan to attend college. After graduating high school, Selena Alvarez needed to pay her $350 college tuition bill. Her mother advised Selena to open a Visa card with a $500 limit and offered to make the payments. But soon after doing so and paying her tuition, the bank soon charged her an additional $100 origination fee and a $10.95 monthly maintenance fee—she had just $33 of credit left. Instead of enrolling in school, Selena had to find a job to pay off her credit card bills.
Charging high fees to people in economic trouble was the bank’s business strategy. The news report shows the deposition of a former bank employee who revealed that her boss described the bank as a “fee based company” and referred to its clients as the “scum of earth,” “lowlifes” and “deadbeats.” Such dehumanizing rhetoric must be necessary for a CEO to justify the type of business practices in which he engaged.
Selena’s story has a somewhat happy ending: after ABC News continually contacted the bank’s CEO, he agreed to waive her debt. She is now attending college. But what about all of those would-be college students who won’t have ABC News make a phone call on their behalf? The federal government should not wait any longer to afford these people some protections for these credit card predators.
It's bad, and excessive fees like this should be illegal. Better disclosure of fees should also be required--a big summary table in large print right at the beginning of the credit card/loan agreement should be mandatory--maybe even including a statement at the top of the table: "WARNING: The following additional fees may be charged"
Most important, though, we need better financial education starting in grade school. Too many Americans are financial illiterates, and in a complicated world with lots of predators lurking, consumers need to be finacially competent. We can't legislate away all deceptive practices--the schemers are too creative and too motivated and will always find new ways to capture the unwary. The only way to avoid getting burned is to be smart about what you're getting into and to pay attention even to the fine print. And always remember, people don't give you money without strings attached (particularly if you are poor and don't have a lot to give back): caveat emptor!
March 31, 2008 7:33 AM | Reply | Permalink
Funny, but those names the former employee called the consumers is exactly what those who run these co's are.. low life and the scum of the earth!
How that guy from financial services can say with a straight face this is fair is beyond my understanding.
I agree with Purple State, there needs to be more education.
March 31, 2008 8:09 AM | Reply | Permalink
We absolutely need more financial education early on.
The fact is, the information on all of those fees was included with the original application. I don't know about that particular application, but all the stupid offers I receive put the fees in a nice little chart with the outrageously high APR in a larger font.
The problem is, people aren't told / don't realize that the card they open will have strings, and, just like when you're signing a contract, you need to read all the details and make sure you know what those details mean before you sign anything.
By educating the public and training them to read the fine print and ask questions when it doesn't make sense, the scum can either choose to rise up and tell Applied Bank where to stick it or suck it up and take responsibility for the debts they take on.
March 31, 2008 9:29 AM | Reply | Permalink
The problem is, people aren't told / don't realize that the card they open will have strings, and, just like when you're signing a contract, you need to read all the details and make sure you know what those details mean before you sign anything.
I completely agree with this. The problem is, if you actually do read the credit card agreement, you won't understand the true legal implications of it without hiring an attorney. It is extremely complex, filled with tricks and traps that even get by most attorneys. If credit card holders were suddenly to truly understood their credit card agreement they would immediately close their account.
March 31, 2008 1:34 PM | Reply | Permalink
Yes, that's where regulations come into play. We need to force the purveyors of these debt instruments to present information in simple clear format and in large type. Any part of the contract that's not in simple format and large type should be unenforceable.
March 31, 2008 1:55 PM | Reply | Permalink
Okay, I have one of these applications right here in front of me. Here's the thing - the little insert that explains the fees is not that difficult to read. It's in a typical 11pt. sans serif font. In fact, the part that talks about APR and how that APR increases for balance transfers or missed payments is in a larger, bolded font.
I agree that some of the terms and clauses are hard to read, but the part that this column focuses on - the fees - is spelled out nice and neat in an easy to read chart.
I can see how some folks would have a tough time focusing on the insert when the application itself has stickers (STICKERS!) letting them pick which color card they would like. But, I really think that at some point people need to know that when you sign a form asking for credit, you are responsible for the strings that are attached to it. If the credit card company lied or left out info that would be one thing, but it's right here for anyone who wants to know what they're getting into.
Absolutely, we need financial education to be a part of the standard, government funded curriculum. But spending money on more regulation and oversight seems wasteful.
March 31, 2008 11:44 PM | Reply | Permalink
burnedoutdem,
This is funny that you mention this, but it makes a great point. You are like most people and you think that the application with the legal disclosures is the contract. If you read it closely, you will see that it says that you will agree to all the terms and conditions of the card agreement that will be sent to you when you get the card in the mail. Those terms supercede the terms in the application. So, what you are looking at is not the contract, it is an offer for a contract when you send it in. When you are approved and you get a card, you get a counteroffer which is a ton of small print and usually very long. That contract is initiated when you activate your card. Most people don't read a word of it.
My complaint, which is a very legitimate one, is that this new contract is not disclosed in its entirety before you submit your application. This is an abusive form of contract formation. You have a new account on your credit report, affecting your credit rating before you have a chance to see the actual contract. It is this agreement that I am referring to in my previous post. In this agreement are numerous other tricks and traps just like the one you just fell for.
April 1, 2008 1:03 AM | Reply | Permalink
THAT'S totally fair, but that isn't the story that was told in this ABC News report that this blog/column uses. The fees that Selena and her mother were hit with are the same fees that are spelled out on the insert that's now at the bottom of my shredder - APR, origination fee, credit monitoring fee, monthly maintenance fees, etc. There are few surprises here.
But the fact that there's more to the contract that you don't get to see until AFTER you send in the application is disturbing. I called my own Visa company and asked about that, and they concurred that there are terms that aren't in the application but you can read them in full when you apply on the website or they can mail the details to you if you want them before you sign up.
Still, this isn't unlike any credit card, bank, cell phone provider, etc., who can change some terms of your agreement at any time, well after you sign up. I think that if you are going to spend taxpayer money on credit card disclosure then you also need to force companies to obtain customer approval to change any contract terms mid-contract.
In any event, I get nervous when I see the government spending money to regulate something that could be solved - for free - by people just paying attention and reading before they sign up. At some point, individuals have to be responsible for their own decisions, too.
April 1, 2008 9:45 AM | Reply | Permalink
I agree with you on the over regulation. The intense amount of regulations already in place aren't working. That is why I believe overhauling the system is necessary and turning the industry in to a non-profit sector. That simple regulation will get to the core of the issue that has allowed this problem to get so bad, as I posted below.
Consumers have their role in taking responsibility as do the lenders. The problem is, while everyone is blaming the borrowers, it is the lenders with all the power in the relationship. Consumers don't have enough control to correct mistakes, instead they are demonized for not having money to pay their bills. There is a better solution.
April 1, 2008 10:32 AM | Reply | Permalink
woops, that was supposed to be "so-called scum." I forgot to proof that...came off way more harsh than intended.
March 31, 2008 10:08 AM | Reply | Permalink
Just think, when Bush ws trying to privatize Social Security he said; 'Its the people's money and they can invest it better than the Government can.'
The sad part is, most of the public believe Bush.
John, to wingnut cousin: "Where are you going to invest your Privatized Social Security funds?"
Cousin: "In the Market."
John: "Where in the Market?"
Cousin: "In the Market, what's wrong with you?"
John: "What type of investments in the Market?
Cousin: quizzical look on face.
March 31, 2008 12:05 PM | Reply | Permalink
Exactly, John!
And sadly, too many Americans seem to think investing in the market means spending their entire paycheck at the local mall . . . or worse using their credit cards to leverage their investments in the various markets they frequent . . .
March 31, 2008 1:59 PM | Reply | Permalink
Retail banks make 33% of their income on fees. Why? Because they can. I am not in favor of regulating fees banks can charge because that will simply shift the fees-revenue into interest rates. I am in favor of a government score of lending institutions that includes fees. This would make consumer shopping of their lenders much easier, as well as encourage lenders to be competitive.
March 31, 2008 2:19 PM | Reply | Permalink
I think turning the banking industry into a non-profit industry would be the best regulation. That way the unbelievably high executive salaries would no longer be allowed, and it wouldn't be a business driven by profits. That is why I do all my business with credit unions. They don't have to find ways to fund excessive executive salaries and grow stock prices.
Banking does little to add to productivity. They do more to suck wealth out of the economy than to contribute to it. They move money around. We need a place to keep our money, but the price for doing that has gotten too high, and banking is driven by loaning money. They have become nothing more than retail stores for loans with loan officers that are simply salesmen. In their effort to remain profitable, they find ways to lend to the riskiest borrowers. Citibank is on record with Elizabeth Warren in her book "The Two-Income Trap" indicating that they need those risky customers for the fees and interest they charge. They make up 75% of their profits. Banking does not belong in the for-profit sector.
March 31, 2008 4:11 PM | Reply | Permalink
I have long thought that credit card companies would become the next cigarette companies. Remember the endless discussions about choosing to smoke and "no harm done" protests from the companies?
Eventually, people realized that once people were smokers, there wasn't much choice involved, and that harm was done. Legislation and lawsuits against the companies were helpful, but what really took the companies down was public perception that smoking just wasn't cool anymore and that buying the hype or the products was a bad idea. In other words, smoking took on an "ewww" factor.
This is about to happen to credit card companies. And it's about time.
Hey, maybe those abstinence-only sex education program materials can be repurposed toward credit-abstinence programs!
April 1, 2008 2:10 PM | Reply | Permalink
The original post is about a particular kind of credit card that is marketed to high risk people.
As sneaky as all the CC co's are, it's the ones like
Applied, First Premier, Aspire, Salute, Tribute and others that are the fee harvesters. Once people sign up for them, they automatically get fees piled on.
The well known co's are certainly known for dirty tricks but many, many people use them responsibly and not only never have any problems, but they get cash rewads and increased credit credit scores which are important in many areas of life. The trick is to only charge what you can pay off completly when the bill arrives. Some like to argue about this, but many, many, people have used credit cards responsibly for decades and never had a problem.
April 1, 2008 2:39 PM | Reply | Permalink
@BabyBelle - the only way to "responsibly" use companies like the ones being described here is not to use them at all. Would you go to a loan shark? Neither would I.
April 1, 2008 4:48 PM | Reply | Permalink
Excellent point! Unfortunately, if you really look closely, ALL these credit card companies are no better than loan sharks. It isn't just the most obvious ones mentioned in this post. Most of us have bought into the lie that we are benefiting from the "rewards" programs, when actually Dunn & Bradstreet's study shows that credit card users spend 12% to 18% more than they would without the convenience of a credit card. CardTrak found that 60% of card users carry a balance. Consumer Reports found that 75% of airline miles are never redeemed. With Universal Default, if you lose your job and use your credit card as a bridge to the next job, you pay dearly for it. If you don't find a job fast enough, you could easily end up in bankruptcy as a result of the heavy fees and high interest. They pick your pocket without you really knowing about it until it is too late. It is extremely saavy deception.
For more reasons why credit cards cost you more, and sometimes dearly, see this article. http://www.bankrate.com/brm/news/cc/20021106a.asp
Jim
http://www.thetruthaboutcredit.com
April 2, 2008 4:06 PM | Reply | Permalink
No kidding! LOL!
I don't use them. In fact, I don't use any credit cards.
The ones described here in the original post are
FEE cards . Not all credit cards are fee harvester cards. If they were, many bright people who have used credit cards for years would have ditched them many years ago. They keep them because they are getting a free loan and rewards, which are really payback from the extra charges the businesses attach because of the merchants fees Visa and MC charge them.
April 1, 2008 5:14 PM | Reply | Permalink
It occurs to me as I read these tales of woe that there used to be a regulatory/statutory structure in place that was designed to reign in just this kind of excess by lenders. These laws/regulations I am referring to are collectively called the usury laws. Unfortunately, there is no federal usury law and the federal courts have eviscerated any meaningful enforcement as it applies to national institutions by allowing them to forum shop and declaring that any and all state usury suits must be brought in federal court.
Perhaps the nature of the solution to this problem is to enact a Federal Usury Law that applies to consumer contracts. This would differ from the ‘pre-signing’ reg Z disclosure requirements by focusing on the ‘back end’ calculation of the actual interest rate. If the payment stream made by the consumer exceeds a interest cap set in the contract or by law then the institution would reimburse the card holder for the overcharge. For the purpose of this discussion fees such as ‘late-fees’ or ‘over-balance’ fees are in fact fees related to the time value of money and could be subject to the usury cap. Fees such as ‘NSF’ charges which derive from other bad acts of the consumer would not be subject to the cap.
2¢
April 6, 2008 11:26 AM | Reply | Permalink