Beware the Credit-Industrial Complex

My daughter is a freshman in college and is learning a lot, including how to manage her money. Recently, she got a powerful initiation into the predatory practices of banks -- a lesson more and more of us are learning each month. She made a miscalculation and thought she had more in her account than she did. When she went to make a withdrawal from an ATM machine, the bank let her, even though she was in deficit. Comerica bank continued to let her make such withdrawals, and charged her $32 a pop for doing so. A $4 charge at a coffee shop became a $36 charge with the fee. A $6 sandwich became $38. She had never authorized the bank to permit deficit spending. And she, like most people, had no idea that the bank would still let her use her card if she was broke. The bank doesn't tell you it will do this. Why? Because it's a huge source of profit for them.

BusinessWeek reported on a student whose bank, Pittsburgh's PNC, allowed him to charge $230 on his debit card even though his account was in the hole. PNC charged him $217 in fees for the privilege. A PNC spokesperson says such a policy "helps our customers avoid embarrassment." The student said he would rather have been embarrassed than gouged.

In 2004, banks pocketed $32 billion in service fees, up from $21 billion in 1999. According to BusinessWeek, such fees accounted for 76 percent of profits at the Midwestern bank, TCF. Wells Fargo in San Francisco reportedly charges $2 every time someone with a low balance calls a service representative, and a whopping $30 an hour when a rep helps someone reconcile an account. Not surprisingly, the majority of these fees falls upon the poorest customers.

One out of five customers switches banks because he or she is so outraged by these charges. One estimate by Gartner Research shows that it costs banks less than 50 cents to return a payment request, while turning around and charging us anywhere from $25 to $40 for this "service."

The barely regulated banks are getting away with one usurious practice after the next: In addition to the subprime fiasco now threatening the entire economy, there are the extortionate service fees on your bank accounts and the escalating interest fees, late fees and truncated payment cycles on your credit cards. Millions of us now get credit card bills that give us 10 days -- and those aren't 10 business days -- to pay up or get hit with a late fee. No wonder the credit card industry has been one of the most profitable in the country, earning on the order of $30 billion annually. The rates credit card companies charge retailers have gone up 85 percent since 2001, and those are passed onto us.

In 2005, Congress passed the infamous bankruptcy "reform" act after major lobbying by the financial-industrial complex, adding to the enormous pressure many people are feeling from the mortgage-housing-credit crisis. Designed to protect creditors, the law makes it harder and more expensive to declare bankruptcy.

It used to be that people in financial trouble could file under Chapter 7, which typically allowed them to keep their homes while other property was sold off to help cover credit card and medical debts. What pissed off the banks was that, after flooding everyone with offers to acquire even more credit cards, some of this debt would get massively reduced or written off under the old law.

The new law forces people to file under Chapter 13, which requires them to accept a 3- to 5-year repayment plan on all debt. This may lead to even more foreclosures. And for those who still can use Chapter 7, it now costs twice as much to file as it used to. While many conservatives blame individuals for charging and borrowing irresponsibly, one of the major causes of going into such debt are the huge medical bills racked up by those without health insurance.