Monday, November 22, 2004

16 Tons, What do you get?...

Fascinating, yet all-too-often-heard story in the New York Times: The Plastic Trap: Soaring Interest Compounds Credit Card Pain for Millions. Perhaps one of the most interesting tidbits:
In the 1990's, Mr. Strachan traveled frequently from his home on the West Coast to Amsterdam and other foreign cities to meet with suppliers of tulips and exotic flower varieties that he distributed to domestic florists and wholesalers. He obtained a WorldPerks Visa card that rewarded him with seat upgrades through Northwest Airline's frequent-flier program.

"I used that card whenever I possibly could because of the travel benefits," he recalled, sitting in his living room before stacks of credit card bills, change-of-terms notices and other correspondence between him and several lenders. "Never paid a penny of interest."

He was such a valued customer then, he said, that US Bank, which issued the card, had extended him a high credit limit of $54,000 even though the card rate was just one percentage point above the prime rate. When the economy wilted after the collapse of the stock market in early 2000, so did Mr. Strachan's business. He began using his credit lines on that Visa card and a few others to stay afloat, paying smaller portions of his growing balances.

Then, in May of last year, US Bank sent Mr. Strachan a letter telling him that it planned to raise the card's rate to 20.21 percent, nearly quadrupling the existing rate of 5.25 percent.

"I wasn't late, and I didn't go over the credit limit, and I didn't write bad checks," Mr. Strachan said. A representative of US Bank told him he was using too much of his available credit, he said.

A US Bank spokesman declined to comment on Mr. Strachan's account.

The monthly interest charge on his $50,000 balance jumped from $209 in June to $756 in July and $808 in August. He eventually persuaded the bank to restore the original rate, but the bank closed the account, shutting off a key source of credit.

By then, Bank One, another creditor, had compounded Mr. Strachan's woes. He was carrying a balance of about $70,000 on one account when the bank started raising his rates, first to 19.99 percent in April 2003, then to 22.99 percent the next month, then to 24.99 percent in June. By October of last year, he was incurring a monthly finance charge of about $1,500 on a $77,000 balance.

"It was like they almost all had a little meeting in the back room and said, 'Let's get Strachan,' " he said of his creditors. "How does it serve them to treat people like that? Are they trying to force them into bankruptcy?"

Lawyers he consulted advised Mr. Strachan to take the easy - and increasingly popular - way out by filing for bankruptcy protection, but he refused. He is struggling to make good on his debts "because I have principles and ethics."

But the battle to dig out of a deepening hole has taken a toll. Mr. Strachan said he had lost 30 pounds and described himself as a "broken man."

Lately, he said, Bank One has periodically reduced his credit limit to a level just above his remaining balance, leaving him little margin for error. Some months, he said, if he were to pay only the minimum due, the ensuing finance charge would put his balance over the limit, triggering a penalty fee.

By doing that, he said, "They create their own little monster."

He was using too much of his credit? You gave him the credit! Why would you possibly give someone more of something than you wanted him to use?


This article compliments an episode of "Frontline" that's supposed to air this week about the same subject.

Don't get me wrong, I don't encourage people to take on debt this way, and I do think that there has to be some sort of consequence for people who thought that they could get free money with no strings attached. The credit card companies are exploitative, but that's their nature, and people should expect to get burned in some fashion if they aren't careful. It's like Las Vegas: The house always wins.

But that's not to say that there aren't people like the gentleman in the story above, who played by what they thought were the rules and got a raw deal.

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