What ever happened to usury laws?

Credit-Card Gouging Grows

by Conrad Weisert
March 10, 2008
© 2008 Information Disciplines, Inc.

This article may be circulated freely as long as the copyright notice is included.

A common scenario

You just opened your monthly credit card statement. You owe $361.72, which you intend to pay in full by check. You write the check and put it into the envelope along with the statement header. Then you notice that the due date is only nine days in the future. You examine the envelope the statement came in. It bears neither a postmark nor a dated postage meter imprint, nothing to show when it was mailed.

Still, there's no problem with that. The next morning you stamp the envelope and drop in a mailbox. Surely there's plenty of time.

But the next month your credit card bill shows that your payment in full was posted one day after the due date. You've been charged $4.82 interest plus a $39 "late fee". If you pay it, the credit-card issuer will have made $43.82 on your $361.72 balance, or 12.11% for one day, or an annual rate of 4422 %. Even if we consider the 12.11 % as a full month's charge, the annual rate is still 145 %, far beyond the pre-deregulation usury ceiling. You might do as well with your neighborhood loan shark.

No, they didn't fix it!

(Update, March, 2010)

U.S. news media gave a lot of publicity to recent "reform" legislation aimed at curtailing the worst practices of the credit-card issuers. If you expected the law to correct the abuses described in the accompanying two-year-old article, however, you were disappointed.

It did correct some of the absolute worst abuses (not even mentioned in the article) such as raising the interest rate on an existing balance, but the problems of astronomical interest rates, outrageous "late" fees, and questionable timing remain. Credit card users are becoming resigned to being in a permanent adversarial relationship with their issuer.

The "free market" triumphs again!

If you protest, you might persuade the credit-card issuer to rescind this one exorbitant charge, but you won't persuade them to change their terms, and sooner or later the same thing will happen again.

You may eventually elect to cancel that credit card, paying the balance in full, but that just leads to two more complications:

  1. You'll have a hard time finding another credit-card issuer that doesn't impose equally oppressive terms. So-called "free market" competition doesn't apply to the relationship between banks and individuals.

  2. The original credit-card issuer may not immediately honor your cancellation request, and you'll soon be getting bills for a new "annual fee" plus astronomical compounding interest and late fees. You won't pay that, but now you also have to worry about negative information in your credit report.

Reasons for charging interest

Of course, a credit-card issuer has two legitimate reasons for charging interest:

  1. To cover its own cost of money, and also make a little profit.

  2. To encourage prompt payment
We expect those reasonable interest charges and are willing to pay them. But we see no possible business purpose in 145% interest. That's just gouging the customer.

Not the Statement date

Fine print in your monthly bill may assure you that you have "at least 20 days grace period" to avoid charges. But the 20 days don't start when you get the bill; they start with the statement date printed on the bill before it's mailed to you.

An impatient lady on the telephone assured me that her bank's system absolutely places my bill in the U.S. mail on the same day as the printed statement date. That's nice but seeing a postmark on the envelope would reinforce her credibility.

Note the double standard:

And since when is the normal monthly billing and payment cycle a grace period? That's not what that term means in the business world.

The obsolete mail study

In the 1970s major U.S. banks and other creditors commissioned Phoenix Hecht to conduct periodic tallies of the first-class mail times between pairs of North American cities. Their purpose was to locate their payment collection boxes in those cities that enjoyed minimum delays in mail from other cities. With huge sums in the mail every month, a small difference in the availability of funds could be worth significant aggregate interest.

We must wonder whether today's credit-card issuers are guided by just the opposite view. By having us send our payments to lock boxes in the cities that have the worst incoming mail service, they can make a lot more money in exorbitant interest and "late fees" than they lose in not having our money for a day or two.

One can imagine eager young managers crossing their fingers and hoping that our payments don't arrive in today's mail. Some of them will earn a big year-end bonus for achieving their department's profits.

How does this affect system developers?

The gouging problem will eventually be solved by re-regulation. Meanwhile there's little that I.T. people can do to alter company policies. Nevertheless, a systems analyst can and must raise a flag if a new or modified billing application lacks controls that assure correct and ethical operation. For example, the system (computers and manual procedures) should make it impossible:

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Last modified March 18, 2010