How Credit Card Companies Exploit The Desperate

Posted on April 14, 2007
Filed Under Credit Cards, Personal Finances | Leave a Comment

I get totally disgusted seeing how credit card companies go to ever-greater lengths in contriving to squeeze a buck out of people least able to afford it. This, despite all the supposed credit-reform legislation and fair practices hooey that gets bandied about.

Picture someone down on their luck. Can’t find a job, money’s tight, and they believe they’re out of options. Maybe they just can’t catch a break, or perhaps the situation is one of their own making. They might have some sort of health or mental problems. For whatever reason, they’re desperate for some financial breathing room.

Upon opening their mailbox one day, they find one of those “Pre-Approved Credit Card” offers with their name on it. There it is, the answer to a prayer. It says “Congratulations, You’re Pre-Approved, Enjoy the Benefits….” yada, yada, yada….

So they jump right on it. Usually, they don’t even realize they’re screwed until the first statement – some not even then. Did they read the fine print – not likely – what else could cause any sane person to take any action other than ripping the offer up as junk mail?

Here’s an actual example. The persons name is changed for their protection, but all other information is exact. Fred Smith gets the offer stated above from Credit One Bank, NA in Las Vegas, NV. Inside, it says he’s “pre-approved for a platinum VISA card with a credit line of $200”. No, that’s not a misprint – it really was for $200. And of course there’s a phone number to call to make this happen right away.

So in a few days, the card arrives. Then before Fred even gets a chance to use it, he gets a statement showing he’s already spent nearly half his $200 limit on fees. This is when I hear about Fred’s predicament and get to see the offer and statement.

I can already guess the problem just from the first two red flags – one being any “pre-approved” offer is generally a come-on; the second being the ridiculous $200 credit limit. Unfortunately, 200 bucks can seem a lot of money to those who are grasping for a way out. The disclosure statement on the back of the offer confirms how badly Fred got taken.

Turns out there’s a $69 enrollment fee and a $69 annual membership fee. Not only that but it carries an interest rate of 23.9%. The list of fees continues, and even includes a $3 per month “closed account maintenance fee”. It goes on to state that because of fees, Fred’s “initial available credit will be $125.25”. So out of the gate the guy spent $75 to borrow $200, not counting the amortized enrollment fee that will cost him $5.75 each month.

I see it, and read about it, but for the life of me, can’t understand how any thinking person can do something like this. And yet Fred is far from unique – it happens all the time. I used to think that people just don’t read the disclosures, and certainly, many don’t. But it’s obvious that a large number of folks just don’t get it. They either don’t understand what they read, or common sense gets pushed aside out of desperation.

And credit card companies know this all too well. This one seems to have broken no laws, and disclosed everything up front. The fact is, that they and other lenders have found people in financial trouble will take them up on their offers, even though these folks will waste far more money on fees and interest than they will ever gain trying to use the credit extended them.

And the financiers are laughing all they way to the bank. By the way, anyone feeling sorry for the unfortunate, but comfortable that they’re okay, should realize that if they carry a balance on their credit cards, they’re likely helping pay the costs for these bad credit risks. Substantially higher interest rates on all credit cards – even for those with good credit, is not just inflation, but one way companies underwrite all those write-offs for high-risk credit card defaulters. Think about it!

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