Are credit cards set up like a horrible game of Chutes & Ladders that plays for keeps? In the 3nd of our 4-part interview series with President Obama’s Senior Economic Adviser, Austan Goolsbee, on credit card reform, we ask why credit card companies can raise the APR on stuff you already charged, and go into some of the credit card companies’ anti-consumer tricks like liquid and fickle terms and conditions, penalty fees that aren’t trying to discourage behavior anymore, they’re just pure profit, and teeny-tiny contracts written in “Bank-o-nese.”
BEN: Ben Popken, Meghann Marco here with Austan Goolsbee, senior economic adviser to Obama and we’re gonna ask him about credit card reform.
MEG: Ok, this is a question from reader Johnathan. He wants to know, “Why are credit card terms the only contract I can find that are subject to unilateral dictation of changes in terms?
AUSTAN: The credit card companies reserve the right to change the terms. Uh – there are other contracts that have that feature. There are certain things in credit cards which are even more questionable. Like they reserve the right to change the interest rate on loans you already took out. So when you make a purchase, you have a balance, something happens, your rate goes up, they apply it to stuff you already bought. This is a very iffy type of a contract. Similarly, the print is barely readable, the language is not in English, it’s in kind of “Bank-o-nese,” which you really need a law degree—you probably need more than a law degree. Most lawyers can’t even read it. And it gives them the right to administer fees of their choosing, for behaviors of their choosing, and the argument that they give in response when they you get the fee and complain is, “Well if you don’t like it you should have read the contract.” Or, “You should go find a new credit card.” Those two explanations are deeply not satisfying. That’s why two central themes in the President’s plan are: it’s got to be in plain language, and then a second focus of the President’s plan is prohibiting certain practices, which are just over the line, like, changing interest rates on balances you already incurred, and things like that.
BEN: That feature struck me in particular because when the bankers defend it they say that they’re repricing risk, but as far as I understand, a risk is something that could happen in the future. But if it’s already happened, then where’s the risk and why are they repricing for it?
AUSTAN: You know, the thing is, getting in the insurance business of insuring things that didn’t happen, is a great business. Because it just means you pay us. And that is the situation a lot of credit card companies are in. “Well, you know, we have to be compensated for the risks,” but this is already debt, they already took it out! You had a deal at a certain interest rate, and they’re going back and changing it. In addition, there are certain practices, that even with disclosure they’re very hard to explain. And the view from the Federal Reserve, as well as Congress, as well as the President has been, we gotta address those. So, as an example, if you’ve got two different kinds of debt, some has a high interest rate and some has a low interest rate. The credit card companies have, and you make a payment, the credit card companies will apply your payment automatically to the low-interest rate one. Leaving you the debt of the high-interest one so they get more money off of you. You can explain, what the Federal Reserve found, is you can explain this to people, but a lot of people still don’t quite get what you’re saying, so it’s far better, it’s a far better idea to simply require them to pay down the highest [interest] one first.
BEN: All these different practices you’ve been describing, it sounds like we’re talking about a game where it’s rigged for the house from the outset, and the rules are always changing, and you can never know them, and with credit being so important for consumers, and consumer spending driving 70% of the economy, how did we let it get this bad in the first place?
AUSTAN: It’s not there’s something wrong with credit cards. There’s a perfectly viable business that consumers can benefit from, that the banks can profit from… all the President is saying is let’s be completely above-board, transparent, and honest with what we’re doing, and not engage in certain kinds of practices that are really preying on the lack of knowledge and the lack of understanding on the part of the consumer. Penalty fees to discourage a certain kind of behavior, everyone understands that. Penalty fees where we design it so you can’t get out of paying the penalty as a way we’re going to use just to make money… now I think we’ve gone into a space where we don’t want to be.
Keep track of the entire 4-part series as it rolls out at consumerist.com/tag/interviews/goolsbee.