Consumers speak out on the burden of debt
Source: Providence Journal
December 5, 2008
PROVIDENCE - Steven Santilli says he faithfully makes a payment on his credit-card bill each month, and always pays more than the minimum amount required.
But one day, he said, he noticed that his credit-card company, without explanation, had raised the interest rate on his outstanding balance, to 30 percent; the rate had been between 14 percent and 18 percent, he said.
When he called the company to find out why, all he got was a runaround, he said. An interest rate of 30 percent "is usury," he declared. "It should be illegal. ... How do they get away with it?"
Santilli, 46, of Johnston, was among 100 or so people who attended a U.S. Senate Judiciary Committee field hearing yesterday at Rhode Island College, organized by U.S. Sen. Sheldon Whitehouse, a committee member.
The main point of the hearing was legislation that Whitehouse has proposed that deals with federal bankruptcy proceedings regarding credit-card debt.
But the meeting also gave attendees a chance to raise long-standing concerns about what Whitehouse calls predatory practices among credit-card companies.
"I hear about it all the time" from constituents, Whitehouse said. They tell him about extraordinarily high interest rates, high fees and other practices that he said are "abusive to consumers."
Hidden in fine-print credit-card contracts "are the snares lenders have set for consumers - including the right to raise interest rates for any reason, or, in some cases, no reason at all," Whitehouse said.
The issue is important to many consumers, he said, since about 75 percent of all U.S. households have at least one credit card and 58 percent of those carry balances.
The issue is also timely. As of 2006, the average credit-card balance was almost $8,500, Whitehouse said. "Today, with the economy in a free fall, that number is surely higher. And credit-card companies kick consumers when they are down," he said.
For example, a payment that is one day late results in an average penalty of $28, "even though the cost to the credit-card company is negligible," he said.
When credit-card companies raise their interest rates on outstanding balances, debts can mount quickly, said John Chung, associate professor at Roger Williams University School of Law in Bristol, one of several experts who testified at yesterday's hearing.
"At an annual rate of interest of 36 percent, compounded daily - which is how my credit card works - how long does it take for a debt of $1,000 to double?" Chung said.
The answer, he said, is just under two years. "I wonder if the typical consumer debtor understands the destructive effect of these interest rates," he said.
"The math tells us that once debt starts compounding at rates like 36 percent, the borrower will end up trapped in a vicious cycle of debt spiraling out of control," he said.
"Laws against usury were designed centuries ago to address this problem, but modern lenders have managed to avoid the application of those laws," Chung said.
Providence lawyer Keven A. McKenna put it this way: "Everyone thought that the loan sharks were the Mafia. Wrong." The real sharks are the money managers and credit-card companies, McKenna told the group in a question-and-answer session that followed the formal part of the hearing.
McKenna criticized the recently enacted federal bailout law for "helping out the predators" while doing "nothing" for consumers.
Whitehouse called for more oversight, and also urged consumers to be vigilant, especially when it comes to credit-card offers they receive in the mail.
These mail solicitations represent "a very sophisticated marketing strategy," Whitehouse said. "And if you're not very, very careful," he said, "you could get in deep [financial] trouble" and the credit-card company "won't help you out."
Devin Driscoll, 22, of Providence, said he has received "a lot of offers" for cards since he graduated from Providence College earlier this year.
The offers are tempting, "especially when you're right out of school" and the job market is tight amid the nation's recession, he said.
So far, he has resisted, but it has not been easy, particularly because Driscoll, like many college graduates, faces a debt burden of another sort - college loans. "I hope I get a good-paying job," he said.
Chung said that without federal intervention, "I don't see an end" to the sorts of abusive credit-card industry practices that were raised at yesterday's hearing.
Whitehouse said that the practices "are unfair and unsustainable - and I believe these practices could lead to another financial collapse unless Congress acts." He called for greater legislative and regulatory oversight.
Santilli, who runs his own catering business, said it is easy to run into trouble with credit-card companies.
"They can use those little tiny loopholes" to raise interest rates and fees and take other steps to punish consumers, he said.
"All I do now is move money around" from one card to another "to get the best interest rate," while continuing to make timely monthly payments on all of his cards, he said.
Santilli did not publicly address the hearing. Instead, he sat in a seat toward the rear of the auditorium at William C. Gaige Hall on the Rhode Island College campus and took it all in.
It was his way, he said, of showing support for Whitehouse's efforts to try to curb the industry's anti-consumer practices.
"Everybody's afraid of corporate America," including politicians who accept campaign contributions from credit-card companies and other financial-services firms, he said.
But as word spreads about Whitehouse's efforts, Santilli said, he hopes more people will back the senator's endeavors. "I'm just hoping it's not all pomp and circumstance," Santilli said.