This is an excerpt from an interview I did with Dr. Robert Manning, one of the top experts in consumer debt. Dr. Manning has testified in front of congress and is seen frequently on news programs throughout the world.
Randall: Hi everyone, today we have a very, very special guest, Dr. Robert Manning, who is the research professor and director of the Center for consumer financial services. He is also the author of the widely acclaimed book, Credit Card Nation, which received the 2001 Robert Ezra Park award for outstanding contribution to sociological practice; he received the prestigious 2003 George K. Polk award for investigative journalism, and the 2004 Harry Chapan award for poverty research, while he was studying all of the information on debt and credit. Now, Dr. Manning is also frequently invited to appear in front of the U.S. Congress Committee hearings, for the U.S. Senate Banking and Judiciary House financial services committee, and his research has actually influenced the public policy debate on consumer debt in the U.S. Dr. Manning, welcome.
Manning: Well it's a pleasure to be joining you, I am indeed the Director for the Center of Consumer Financial services at the Rochester Institute of Technology, and indeed recently testified before the Senate Committee as they reviewed some of the most outrageous policies of the credit card industry.
Randall: And let's just start there. What are some of the most outrageous policies? Because most people, I think they just use their credit card and they get their bill at the end of the month and they don't really pay much more attention to it. So what's really going on behind the scenes?
Manning: There are several key issues that the average person needs to understand. One, do they have a variable vs. a fixed rate? You see this term constantly thrown out by the industry. You've got a fixed rate for life and you find out they didn't like something that occurred with a payment to a creditor, with a completely different financial institution. And suddenly that fixed rate, interest rate went from 3.9 to 32 %. First there is no such thing as a fixed rate anymore. Second thing is, you don't have a relationship with that particular bank anymore as it relates to the cost and terms of your loan contract. What's been called universal default, the bank's regularly scour every aspect of your credit report to look for some kind of negative information that they can use, in a sense like a black box, they don't tell you exactly what happened, you suddenly see that your interest rate has jumped up thru the roof. So interest rates today, they used to be very regular, fixed and predictable now have become part of the capricious policies of the credit card industry where they can essentially blame you, for the audacity of raising your interest rate as much as eight to ten times.
Randall: So, even if you are "guaranteed an interest rate for life" that only lasts as long as they want it to last?
Manning: Absolutely, that's one of the key issues we have been fighting against on my most recent testimony, including here and New York State. The state legislature has argued that they will try to fight the credit card industry, even if it means they don't have the statutory control over what's called federal preemption. And this is a key term that we hear all so often, because what's happened is that nationally chartered banks can only be regulated by the U.S. Congress. And so many people have asked what happened to the state (9:49) law, and what happened in 1978 was the Supreme Court basically said that the interest rate that a bank charges on its credit cards will be defined by the interest rate of the state, that they have their headquarters.
And as a result the banks have moved to places like Delaware, or in Utah, and even Arizona, which has the only interest rate cap at only 36%, and as a result they can literally charge anything they want, by exporting that interest rate to the state where you receive your credit card, which means that only Congress then can regulate them. And this same decision by the Supreme Court was reaffirmed in 1996 with a Citibank decision, which basically said that states could no longer regulate the cost of fees on your credit cards. So, it's just a matter of time before we see $50 late fees. And the federal preemption was extended even further in a district court decision that I was involved with that was litigated by the state of California, and basically the state was requiring the credit card companies to tell their clients how long it would take them to pay off their cards if they simply send in the minimum payment. And the American Banking Association fought that, and the banks won, so that now, federal preemption even includes issues regarding disclosure for how well consumers understand their credit card contract.
So the banks have been very successful in making the cost of credit skyrocket, more than triple since the deregulation of the banking industry in the early 1980's. And now even consumer information has become withheld because Congress is not forcing the banks to become more forthright about the terms of a consumer contract.
Randall: Wow, so Arizona has a cap of 36% on their interest rate and that's great, but, what's the highest interest rate a bank could charge somebody?
Manning: Well there is no limit in these other states. 36% tends to be the limit simply because Bank of America is headquartered in Arizona, and nobody has yet pushed it beyond that. Except for what are called sub (12:19) credit card. These are the most outrageous credit cards where you get an offer for $250 to $300, but then you find out that they have charged you anywhere from $150 to $200 in fees, and that's where the effective interest rate could be over 1000% per year.
Randall: That's a pretty hefty loan. OK, so there are so many credit cards out there, and in today's world, and I'm getting down to the nitty gritty, but in today's world it is so difficult to live without some kind of credit card especially if you travel or go to school or something. So, can you give us some idea on maybe what is one of the best ways for people to find the best credit card for themselves, how do they avoid the 36% credit cards?
Manning: Well I highly recommend the consumer read a site called creditcardratings.com, This is a site where the consumers actually rate the best cards for your particular situation. So if you are for example are looking for the best gift cards, or looking for that cards that offer you to get a free gift, if you are looking for the card that charges you the lowest interest rate and the low fees, you can actually log on and see what other consumers have to say about that particular card. So I strongly recommend creditcardratings.com, and you can actually apply for that particular credit card online as well.
Randall: Now something that a lot of people don’t seem to understand is that there is a difference between a credit card, a charge card, and a debit card. Can you tell us what those differences are and how they might apply to different people, which one might be best for them?
Manning: One of the most ridiculous aspects of our financial system is that if you pay your obligations in cash, and that includes a debit card. You will have a very poor credit score. So some of the most credit worthy people in America is some of the most credit evaluations in the country. And so with a debit card, a lot of people don’t realize that just because it says visa or MasterCard on it, it doesn't come with a guarantee, it doesn't come with the fraud protection that a credit card has, and in fact if you use a debit card, which is linked to your checking or savings account, it's essentially like using a check, except as a courtesy to you as a client, your bank will offer you an over draft protection.
This is a very scary aspect because you could go over your account by as much as one or two cents, and end up being charged hundreds of dollars for each transaction. So debit cards do not mean that you are not going to end up borrowing money, and end up being charged for many fees, as well as high interest rates, and, you can actually through identity fraud, and theft, not only can your debit card be used for transactions, but its been used to actually drain your entire checking or savings account, and there is no protection for that fraudulent use, so consumers need to be very weary about debit cards. Credit cards on the other hand, are just an open line of credit, what's called a revolving line of credit, and consumers are given an interest rate, if they carry a balance. There are some cards that will charge you a finance fee, even if you pay off the balance each month. And consumers need to be very careful about what the fees are, and keep in mind, since 1996, the Supreme Court essentially lifted the cap on what a bank can charge on fees.
Fees have gone from $1.3 Billion to over $16 Billion in revenue to the credit card industry in 1996, so banks are constantly looking for ways to charge credit card users extra fees, and even a lot of the free things, like the itemized statement at the end of the year, now come with a fee. It is also very important to remember you may see Visa or Master Card on your credit card, but your contract is actually issued by a specific bank. So you don't go to Visa to complain if you have a problem, you actually have to call your Citibank or Chase Bank of America account; they are the ones who are actually pricing the cost of credit on that particular account.
A charge card on the other hand, is simply a promise to pay over a specific period of time, usually an American Express card and will come with certain protections with its use such as if your card is stolen, you won't be held liable for fraudulent use, but, you have to pay the amount in full at the end of the month.
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I am yours in success,
Randall
