How to Fix the Economy, Part One: the Credit Card Companies

Our economy is in serious trouble. And at the end of 2007, the Federal Reserve started dropping rates in an effort to keep it from plummeting further. Part of what this should have achieved was reducing the amount people had to pay for adjustable rate loans - not just mortgages but loans like credit cards.

But credit card companies and banks couldn't have this. Instead of letting bad debts and foreclosures eat into their profit margin and potentially spoil big bonuses for the CEO's, they started raising their rates, legally.

How? In a small print section of most credit card agreements, there is a little known "General Default" rule. In a nutshell, it says if you default on one loan, even if it's not with them, they can hike your rate to the "Default Rate". So say you've religiously paid your credit card because you didn't want your interest rate to escalate but your ARM mortgage reset and you've gotten behind on your mortgage. Under the "General Default" rule, your credit card rate escalates anyway.

Another way they are doing it is by raising interest rates because, well, just because. Bank of America did it to over 1500 of their credit card customers with no viable explanation. They hadn't missed or made a late payment, didn't fall under the General Default rule, and when card holders asked for a reason why, they didn't get a clear explanation. Citicards just started doing the same. And these aren't small increases either. One cardholder with Citicards was recently notified of a 10% hike in her interest rate - basically just because they can.

And hold on to your socks because as of a few days ago, they are at it again. Now they are going to start cutting credit limits in order to reduce their risk. And this is going to wreak havoc on your credit score. Say you've got a credit limit of $10,000 and are carrying a $5,000 balance. Right now, you've got $5,000 in open credit. But if they cut your credit line by $5,000, all of a sudden you have a maxed out credit card. So now your credit score is lowered which translates into more difficulties in getting financing even though you really hadn't maxed out your card. And I would also hazard the guess that later on they will increase your interest rate because your credit worthiness dropped. So what if they caused it; it's a win-win for them.

So how to fix it? Since credit card companies seem determined to cause more economic problems, I think it's time for our government to step in.

There is a simple solution that can be effective immediately. Re-instate the usury laws for banks and credit card companies. Usury laws regulate how much interest can be charged for a loan and in the early 1980's in order to fight inflation, Congress made an exception to the usury laws for banks. Credit card companies that carried the N.A. designation were then exempted from the usury laws. And it worked - by being able to charge higher interest rates, they offered more and more credit which consumers used to ease the strain of inflation. But now they are tightening credit and increasing rates. If Congress repealed the exemption, and made it retroactive, your credit card interest rates would drop drastically and immediately. And maybe they would loosen credit - if they could only get an 8% interest rate for a $5,000 balance, they might be more willing to leave that credit limit at $10,000 in hopes that you'll use it - thereby getting 8% on $6,000 or $7,000 or $8,000 instead.

And even if you don't use it, your monthly payment will drop and you'll be able to spend that money on gas and food instead. Now there's a stimulus package.

Yes, the credit card companies and banks will scream and cry hardship and will hire very powerful lobbyists to block this measure. But while our economy is screaming and crying hardship, they are turning a deaf ear and only making it worse so they can keep their individual bottom lines.

They seem to have forgotten E Pluribus Unum - Out of Many, One. We are all in this together and have to work together to fix our economic problems. It's time for our elected officials to step up to the plate since these companies won't.