Wednesday, July 30, 2008

Alaska Leads The Nation In Median Credit Card Debt - $3,384 Per Capita; Consider Prepaid Cards As An Escape From Company Predation

According to a study released on July 30th, 2008 by Americans for Fairness In Lending, Alaska leads all states with the highest median credit card debt at $3,384. Media story published by the Anchorage Daily News. National story by

The study was based on 2006 year-end information from TransUnion, one of the nation's credit bureaus. The full list of states can be viewed HERE.

Americans for Fairness in Lending, which advocates for stricter credit card regulations, said the amounts reported were likely lower than other estimates since they were for individuals rather than households. The figures were also for the median borrower, which is the one in the middle of the list, rather than the average of all borrowers.

The study was released as the Federal Reserve considers adopting regulations to stop card companies from a range of usurious practices. Read the 62-page proposal HERE in PDF format.

"Unfair practices by credit card companies are fueling these high debt levels," Jim Campen, executive director of Americans for Fairness in Lending, said in a news release. "Consumers are victims of a range of abuses such as doubling and tripling interest rates, applying higher interest rates retroactively to outstanding balances, imposing exorbitant penalty fees, and requiring binding mandatory arbitration clauses."

So far, no media outlet is offering any analysis. One of the reasons I believe Alaska has such a large lead in credit card debt is its remote location. Many Alaska residents, particularly those out in the Bush where there are no major stores, will order by phone or the Web, frequently making bulk purchases, and pay by credit card. Interior and Bush residents, much more reliant on heating oil, also make bulk purchases of fuel.

But why is Hawaii only rated 27th? It's also remote, isn't it? No, it's not remote - it is a major crossroads for trans-Pacific traffic, and individuals don't need to make bulk purchases of fuel as in Alaska.

Earlier we mentioned some of the credit traps. Additional problems with credit traps are discussed on this Stormfront thread. Here's the list posted on the Americans For Fairness In Lending website (original HERE in PDF format):

Fees and More Fees – On any given month, you might pay a late payment fee, overlimit fee, cash advance fee, balance transfer fee, foreign exchange fee, bill payment fee, Western Union fee, and whatever else your lender can devise. Not to mention monthly and annual fees.

Tricks to Make You Pay Late – These come in many varieties. If you’re late you’ll pay a hefty fee and your interest rate may go up. Check each statement carefully and pay your bill as soon as it arrives.

- Changing Due Dates – Your bill will not be due on the same day every month.

- Early Due Dates – Bills may be due just a few days after you receive them.

- Weekend Due Dates – If your due date is on the weekend and your payment arrives on the date, it won’t be processed until Monday and you’ll be considered late.

- Morning Due Times –Your payment may be due at 9am on the due date, not 5pm.

Approved Overlimit Charges – If a purchase puts you over your limit, your credit card company will approve the charge then hit you with an overlimit fee and maybe even raise your interest rate. Keep careful track of your balance and know that even approved charges may put you overlimit.

Universal Default – Pay Card A on time but pay late to Card B (or anything else monitored by your credit score) and your interest rate on Card A may jump!

“Any Time For Any Reason” Changes – Most contracts include this ominous phrase. It means just what it says – they can increase your interest rate on a whim.

Teaser Rates That Don’t Stick – An introductory 0% interest rate can jump to 30% with a late payment or if you go overlimit. Don’t bank on keeping that 0% rate for the entire promotional period.

Retroactive Application of Higher Interest Rates – To make things worse, if your interest rate increases, they can apply the higher interest rate to the entire existing balance, not just to new charges.

Allocation of Payments – If you end up with two or more different interest rates, they will apply your payments to the balance with the lower interest rate first. The rest of your balance will continue to generate high interest charges until the low-rate balance is entirely paid off.

Tricky Interest Calculations – For some cards, you can pay interest on purchases from previous cycles. This is known as double cycle billing. Look for a card that uses the “Average Daily Balance” interest calculation method.

Credit “Protection” – Services like this may sound good, but they’re usually useless. The fee for the service likely exceeds the minimum payments it would cover if you became sick or lost your job. Avoid add-on products like this.

Binding Mandatory Arbitration (BMA) – This provision requires that you resolve any conflict with an arbitrator selected by the lender, which means you give up your right to take the credit card company to court.

As mentioned earlier, the Federal Reserve is considering 62 pages of new regulations to curtail these abusive practices. Here are the highlights:

Mandates more time to pay. A payment can’t be treated as late for fees or negative credit reporting unless the bill was mailed or delivered to you at least 21 days before the due date. This helps end card companies' ever-shrinking repayment periods.

End tricks that increase your finance charges. Card companies routinely require you to pay off low-interest balances (like transfer balances at teaser rates) before allowing you to touch higher-interest debt (like new purchases). That’s never in your best interest. The rule requires that your payments must be allocated to give you the full benefit of a discounted promotional rate.

Prohibits rate increases on your existing balance. Today, when a card company jacks up your interest rate, for whatever reason, it applies that rate hike to your current balance. Under the new rule, rate increases can be applied to your prior balance only if you have a variable rate card, your promotional rate expires or is lost, or you pay your bill more than 30 days late.

Eliminates hidden interest charges. Today, some card companies charge interest even on debt repaid during the grace period. The proposed rule would end that.

I know that libertarians hate regulation. But these abusive practices are exactly why this industry needs more regulation. The industry is so consumed with short-term greed that they blind themselves to long-term damage. By their abusive behavior, the credit industry has brought more regulation upon itself. Libertarianism will never work because too many people are just too greedy. Libertarianism simply exceeds the political maturity of the greater society; to offer libertarianism to Americans is like casting pearls before swine.

The ideal way to cope with credit card abuse is to boycott the companies; simply refuse to have any credit cards if at all possible. Unfortunately, if you travel frequently, a credit card is almost necessary in order to reserve lodgings or rental cars. One way to have the convenience of a card without exposing oneself to industry traps is to buy a reloadable pre-paid debit card. You can find an assortment of these cards at any major supermarket (Carr's in Alaska), or you can find out more about these cards HERE and HERE. One catch - businesses who prefer to deduct automatically from a credit card each month may not want to accept a prepaid version because of concern that it may not get reloaded and become invalid.

1 comment:

  1. Yikes, that's a lot of credit card debt. As you mention, prepaid cards are a great alternative and a good way to control credit card debt. A number of cards are reviewed at