Wednesday, May 7
Posted 2 p.m.

Who pays for charitable donation?

I just read a press release about something called CharityChex, a credit card processing system that allows a payer to donate to a specific charity through a retailer at the point of sale. The customer also get a tax receipt right then too. The CEO of CharityChex, Scott Talbot, describes it this way:

"CharityChex combines charity and retail establishments together for the first time to create a win-win situation for customers and businesses who want to contribute to society in a simple, no hassle way."

CharityChex doesn't seem to be used by anyone yet, so I can't tell you who will pay the interchange fee for the transaction -- the cardholder or the merchant. The retailers, of course, are still waging their war agains the credit card issuers like Visa and MasterCard for lower fees. In March, Rep. John Conyers, D-Mich., and Rep. Chris Cannon, R-Utah, introduced a bill that would force the card issuers to negotiate the fees with merchants.

The retailers say they have to pass these fees on to consumers ($350 annually per family, they say), and they infer they'll reduce prices if they get the card issuers to lower the interchange fees. As I've written previously, an agreement such as this was put in place in Australia a half-dozen years ago and -- guess what? -- prices haven't come down for the consumer.

Comments? Questions? E-mail plastic_rap@bankrate.com.

Wednesday, April 30
Posted 11 a.m.

Disclosure or real change: rant

I have a radical notion that people who are in deep financial debt due to credit cards never understood the terms and conditions of credit cards, and some may never have understood that credit card borrowing is a loan without a time limit to pay it back, whose interest rates can change at any time.

I shake my head when I read about all of these financial education efforts being made by banks, credit card issuers, brokerages, etc. There are a lot of organizations who are trying to educate people, but most consumers don't care. They don't know enough to care.

See, the problem isn't just financial education; it's education period. The letters I get from many readers complaining about how much credit card debt they're in or how they've been duped by the credit card issuers are barely readable. The people don't know how to express themselves. Half the time I can't figure out what the problem is from their description. How could they possibly understand the legalese that the credit card agreements are written in?

The Federal Reserve will be issuing a proposal shortly that will try to simplify various aspects of credit card agreements and terms. They hope to make disclosures clearer for the average consumer.

I first read about the Fed's effort a year ago and wrote about it in Plastic Rap. Now they're getting closer to offering a solution, or at least an improvement. Public hearings will be held this Friday in Washington.

Sandra Braunstein, director of the Division of Consumer and Community Affairs, testified April 17 before the House Financial Services Committee and outlined the changes that will be in the Fed's proposal. Among them are:

Advertisements of introductory rates would more clearly disclose the eventual higher rates and how soon they would be imposed;

Advertisements of "fixed" rates would be restricted to rates that are truly not subject to change, either for a clearly disclosed period or for the life of the plan;

A consumer would be sent notice 45 days before a penalty rate was imposed or the rate or a critical fee was increased for other reasons;

The periodic statement's "effective APR," another way of disclosing the total cost of credit, is the subject of two alternative proposals. Under one proposal, the effective APR could be revised to make it simpler for creditors to compute and potentially easier for consumers to understand. Alternatively, if continued consumer testing, public comments and the Board's analysis indicate that the effective APR does not offer a meaningful consumer benefit, then it could be eliminated, as the statute authorizes.

Her further comments highlighted the differences between consumer groups and the credit card industry regarding the proposed changes. Consumer groups say the proposal is mainly aimed at better disclosure and doesn't solve any of the greatest complaints about credit card practices. For example, consumers say the Fed's proposal does nothing to bar the practice of allocating payments to the lowest-interest balance first when there are different rates (say, for purchases and cash advances).

Nor does it address "double-cycle billing," a practice that has long been vilified by consumer groups. (Braunstein describes double-cycle billing like this: "Under the less typical two-cycle method, the finance charge is computed beginning on the date of the transaction, even if that date falls in the prior billing cycle.") She said the Fed did not comment on this practice because few card issuers use this method any longer.

Another area that isn't addressed is the practice of raising an interest rate and applying it to the entire balance, not just new purchases going forward.

The industry, of course, says that these changes will harm consumers by raising credit costs or reducing credit availability, according to Braunstein's testimony.

So what I take away is that this is the best the credit card industry can do for us. Except they're all raising interest rates for all kinds of cardholders because credit is tight, they lent too much money to high-risk consumers (because they could make the most money on them in fees and penalties), and these consumers are defaulting.

Perhaps what will happen is that we'll revert to the '80s, when you had to "qualify" for a credit card. If your creditworthiness wasn't up to snuff, you wouldn't get a card. The industry created this situation with their "risk-based pricing," which means they charge higher interest rates to their less-qualified customers. And the American consumer, who wants everything, fell for it.

Don't spend the tax rebate on that fancy HDTV because they keep showing it to you on your low-def TV that's paid for. Pay down your credit cards.

Friday, April 18
Posted 11 a.m.

Binding arbitration: You lose

Last fall, the consumer advocate organization, Public Citizen, released a report that examined the use of binding mandatory arbitration by credit card issuers. The bottom line, they say, is that the National Arbitration Forum, or NAF, is in the pocket of card issuers such as MBNA (now Bank of America).

Public Citizen looked at 34,000 cases in California over eight months, and this is a synopsis of what they found:

Enormous numbers of affected consumers: With more than 1,600 part-time arbitrators on its national roster, NAF admits to handling more than 50,000 cases a year. In California alone, NAF handled 34,000 consumer arbitrations between Jan. 1, 2003, and March 31, 2007.

Substantial use of binding mandatory arbitration by the credit card industry: NAF identified virtually all of its California cases as "collection" cases filed against consumers by credit card companies or firms that buy debts from these companies for cents on the dollar. Fifty-three percent of those cases involved MBNA credit card holders.

Corporations -- not consumers -- choose binding mandatory arbitration: All but 118 of the cases were filed against consumers by credit card/finance companies or firms that purchase their debts. In other words, consumers chose to bring only 118 cases before NAF while corporations chose this business friendly forum nearly 34,000 times -- 99.6 percent of the total cases.

Stunning results that disfavor consumers: In the more than 19,000 cases in which an NAF-appointed arbitrator was involved, 94 percent of decisions were for business.

Biased decision-makers: Arbitrators have a strong financial incentive to rule in favor of the companies that file cases against consumers because they can make hundreds of thousands of dollars a year conducting arbitrations. The arbitrators are chosen by the arbitration firms hired by MBNA and other corporations, which are unlikely to pick arbitration firms that produce results they do not like. Arbitrators routinely charge $400 or more an hour. Top arbitrators can charge up to $10,000 per day and some make $1 million a year. In comparison, California Superior Court judges earn $171,648.

The busiest arbitrators produce the results corporations seek: In California, a small, busy cadre of 28 arbitrators handled nearly nine out of every 10 NAF cases. This group ruled for businesses 95 percent of the time. Another 120 arbitrators handled slightly more than 10 percent of the cases in which an arbitrator was assigned. They ruled for businesses 86 percent of the time and for consumers 10 percent. Outside of California, there is no information that would allow consumers to even begin to assess the bias of an arbitrator.

A race to the bottom for arbitration firms: Companies track how arbitrators rule, and do not choose arbitrators who do not rule in their favor. One NAF arbitrator, a Harvard law professor, was blackballed after she awarded $48,000 to a consumer in a case in which a credit card company filed a claim against the consumer. After the same credit card company had her removed from other pending cases, she resigned, citing NAF's "apparent systematic bias in favor of the financial services industry."

This week, the NAF fired back with a white paper showing that American consumers prefer arbitration to litigation. Their 36-page report defended arbitration and faulted the Public Citizen data as narrow, coming from just two sources. In particular, the report cites the high "win rates" that Public Citizen said were proof that binding mandatory arbitration favors the business over the consumer. The NAF white paper explains that:

The Public Citizen Report makes much about the frequency with which banks prevail in these types of cases. Yet most debt collection actions do not present a great deal of controversy. Instead, they usually boil down to three facts -- (1) did the debtor open the account, (2) did the debtor incur the charge, and (3) did the debtor make the payment? That is ordinarily the end of the story: If those three facts are uncontested, there is very little to dispute. Therefore, it is unsurprising that banks enjoy high win rates in these sorts of actions analyzed in the Public Citizen Report.

Comparable data on debt collection actions in small claims court buttress this point. Studies of debt collection actions in major cities reveals that the lender typically wins between 96% and 99% of the time, right in line with the lender win rate data cited in the Public Citizen Report. Thus, the high win-rates for banks in the two data sets analyzed in the Public Citizen Report fail to demonstrate that arbitration systematically favors companies over individuals. Rather, it simply confirms the commonsense idea that most debt collection actions are uncontroverted.

Binding arbitration is commonplace in credit card agreements -- take a look at yours and you'll see that you've agreed to settle any disputes through arbitration. And binding arbitration is sprouting all over the place. This article we published last month talks about the use of binding arbitration by employers. When your employer has a binding arbitration clause, it means you may not be able to sue if you are fired or face discrimination.

As more and more consumers are stressed by the faltering economy and rising energy prices, the default rates for credit cards will escalate -- it's already happening. The credit card issuers will take huge losses and limit the amount of credit they can extend; American consumers will go deeper into debt. Anybody know how we're going to get out of this?

Comments? Questions? E-mail plastic_rap@bankrate.com.

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