Week of 1.2.2009
Transcript: Credit CrunchBRANCACCIO: The holidays are over, the new year is here and its time to pay the piper...typically, that means the credit card bills. But when you get to that grim chore in the coming days, read the fine print carefully. It's very possible the envelope from the credit card company contains some changes...higher interest rates, lower credit limits, all sorts of things that experts say could add up to the next wave of the credit crisis. But can regulators act in time? Amy Bucher produced our report.
Andrew Spurlock and wife Michelle are struggling to raise three children, and pay off a credit card debt that is threatening to drag them under.
So, how high did the credit cards get?
MICHELLE SPURLOCK: There had to have been a little over $30,000.
BRANCACCIO: A little over $30,000.
ANDREW SPURLOCK: We weren't out just spending and buyin' a bunch of things that we don't need. We were—
MICHELLE SPURLOCK: And we weren't behind on our payments.
ANDREW SPURLOCK: We were spending to survive.
BRANCACCIO: Spending to survive... more and more families have been relying on their credit cards to tide them over in this time of economic crisis.
ELIZABETH WARREN: The credit card is the way that families have been dealing with every emergency, every bump in the road...
BRANCACCIO: Harvard professor Elizabeth Warren is a leading authority on debt and America's middle class.
ELIZABETH WARREN: Mortgage, health insurance, childcare, transportation—credit cards have been the way that families have tried to bridge that gap.
BRANCACCIO: But too often that life-line turns into a major liability. Credit card companies charging sky rocketing interest rates and high fees make it really hard for card holders to pay off their debt and are driving American families to the brink of financial ruin.
MICHELLE SPURLOCK: Even though I was pregnant I—would clean houses or—you know, whatever I could do. Andy was delivering pizza. We sold our truck. We—I sold everything I could—I could put in a box and ship away.
BRANCACCIO: This was hardly what Andrew Spurlock, a U.S. army soldier in the war on terror, had ever imagined for his family. But in April 2005, his plan for a life-long career in the military came to an end when he was blown off a guard tower in Iraq and fell forty feet onto concrete.
ANDREW SPURLOCK: I had four herniated and two ruptured disk. And then I had nerve damage in my left leg.
BRANCACCIO: Andrew was sent back to recuperate at a military base in Fort Carson, Colorado, where he and Michelle were married.
Then, Andrew was told his injuries were too severe to rejoin his unit.
Andrew and Michelle decided to move back to their hometown of Apopka, Florida, where he had a lead on a job in the Sheriff's department. They bought a modest house, confident that Andrew would get the job.
ANDREW SPURLOCK: I started going through the process and everything was lookin' good until I went and saw a psychiatrist. And the psychiatrist said I needed to decompress from bein' in a combat environment. They said - it would have to be two years before I could reapply.
BRANCACCIO: The job Andrew and Michelle had counted on fell through. And then, Andrew's military disability payments were delayed.
ANDREW SPURLOCK: They told me that it would take me four months to get my disability. And it took—took 18 months.
BRANCACCIO: It took 18—it took a year and a half?
ANDREW SPURLOCK: Yeah.
DAVID BRANCACCIO: So, how do you live in that situation?
ANDREW SPURLOCK: Being an infantryman doesn't really transfer into the civilian world.
BRANCACCIO: The best Andrew could find was a job delivering pizzas. Now pregnant, Michelle planned to go back to work as soon as she had the baby. It was a struggle to make ends meet.
Adding to their burden, Michelle, a single mom before she met Andrew, got slapped with an expensive custody suit over her daughter Leilani.
MICHELLE SPURLOCK: $30,000 later that's—that was not in—in my budget. That was not planned for at all.
BRANCACCIO: Drowning in legal fees, Andrew and Michelle began to rely heavily on credit cards. They took cash advances to help with the mortgage, and used the cards for gas, food, and diapers.
You're not saying, "I went to—Circuit City, or I took big vacations." That's not what's on your credit card statements.
MICHELLE SPURLOCK: No.
BRANCACCIO: And then Michelle got a surprise in the mail. The minimum monthly payment on her cards had jumped from $90 dollars to $270 dollars.
MICHELLE SPURLOCK: So, I call to find out—this is a mistake. It has to be a mistake.
BRANCACCIO: It's almost three times higher than you expected.
MICHELLE SPURLOCK: Right. The interest rate went from seven percent to 30 percent.
BRANCACCIO: Thirty percent, 3-0?
MICHELLE SPURLOCK: 3-0. And when I called, you know, during that phone conversation, "Isn't there something you can do? We're already having trouble making the—the minimum payment of $90, and now it's three times that much. And I've never in the eight years I've had this credit card ever paid late.... is there anything?—"No, there's nothing we can do."
BRANCACCIO: Did you ever find out how long it would take to pay off that first credit card once they moved the interest rate to 30 percent?
MICHELLE SPURLOCK: It would have been well over ten years.
BRANCACCIO: Ten years?
We've talked to people who thought that if you paid the credit card bill on time, you met them the minimum every single month that you're probably okay.
ELIZABETH WARREN: You would think that if you upheld your end of the contract that the contract was still binding. And in the case of credit cards, you would be wrong. 'Cause the credit card companies reserve the right to themselves to change the terms of your credit card including the interest rate at any time for any reason and for no reason at all.
NESSA FEDDIS: Paying on time is a very important element to—demonstrating—what—how—you know, what one's credit profile is. But, it's not the only thing.
BRANCACCIO: Nessa Feddis—an attorney with the American Bankers Association, which represents the credit card industry—sees it this way.
NESSA FEDDIS: Credit card rates may go up based on people's risk profile, which can change over time. Somebody who when they first get the card may be a very—highly credit worthy person. But, over time, things may change and they be—may become more risky. And riskier borrowers pay more for credit just as riskier drivers pay more for—car insurance.
BRANCACCIO: What I wanna be clear on is this: a consumer who hasn't gotten worse. In other words their credit was good enough to have the card all along. They don't feel they've done anything to make their credit profile worse. Are there cases where still the terms can be changed by the credit card companies?
NESSA FEDDIS: The—n—actually, very rarely.
ELIZABETH WARREN: The notion that these credit card companies are pricing for risk is a public relation sham. There's just no evidence that that's what's going on here. What they're doing is they're maximizing their profits.
BRANCACCIO: One way lenders help their bottom line is with fees. Bank of America dropped Michelle's credit limit from 20k to 13k, which left her vulnerable to expensive penalties.
MICHELLE SPURLOCK: So, now we're over the limit. So, now we have over the limit fees. And unless I pay off $5,000 in one chunk. I will always be over the limit. And my payment that I'm making, is not gonna cover even the interest. It's gonna go towards fees.
BRANCACCIO: So this is added burden....what do you think the credit card companies could do to improve the situation?
MICHELLE SPURLOCK: You can't kick somebody when they're down and expect them to you know, cough up. It's very simple. If we—if we are—are struggling to pay $90, there's no way we're gonna pay the $270. And that was the argument that I presented to them. "I want to pay you. I'm trying to pay you. But if you make it impossible, I—you know, I will continue paying what I can."
BRANCACCIO: Did you let the credit card company know that you're a young family with young kids? With—with a husband who's just back from war?
MICHELLE SPURLOCK: I don't think that, you know, we should be given special consideration, because he was in the Army. But these people that I would talk to are just heartless, and cold, and cruel, and go so far as to laugh in my face. And—so, at one point, I did say, you know, "It's—it's nice that you have the luxury to sit there and laugh at us. You have that luxury. And that freedom to do so, because my husband served to protect your freedom." No response.
BRANCACCIO: Andrew and Michelle are not alone.
ELIZABETH WARREN: We've got about 50 million American families who can't pay off their credit cards. They're rolling them from one month to the next month to the next month. And that's a bad sign. This is short term, high-interest debt so, what we have in effect are—we've got 50 million families who are—who are walking around carrying sticks of dynamite and the fuse is lit.
BRANCACCIO: Francine Adams, a divorced mom who raised four children, is battling credit card debt at a time in her life when she thought the struggles were finally over.
FRANCINE ADAMS: I actually—when my youngest daughter moved out, returned to school at 45 to—recreate myself. And I went to LaSalle University and I earned my bachelor's degree in computer science. And—that's when my life really began to change.
BRANCACCIO: Francine went on to get her masters degree and moved to Florida. She landed a job working for a cruise line company and for the first time in her life, made enough money to buy a home, a modest condo near Miami.
FRANCINE ADAMS: It was very important for me to be living the American dream. Like, you know, getting my own home.
BRANCACCIO: But the dream is in jeopardy. First, crazy gas prices last summer hit her employer hard.
FRANCINE ADAMS: They made a decision to—to—lay off ten percent of the company.
BRANCACCIO: At the time she lost her job, Francine owed $16,000 on her credit cards, which she's used to visit her children in Philadelphia.
FRANCINE ADAMS: I had actually stopped using my credit cards. And I was just basically trying to pay them off. What I was doing was accelerating my payments to make them come down even faster. I did that for maybe 3 or 4 months and Bank of America increased my monthly payment. They sent me a letter saying that they were increasing my monthly payment to help me pay off my debt faster. But I was already doing that and eliminating the interest when I was doing it.
BRANCACCIO: So paying extra was no longer an option but a requirement, which became a real burden when Francine lost her job. But when she called Bank of America asking for a new payment plan, Francine says they turned her down.
FRANCINE ADAMS: It seems to me that Bank of America is not consumer oriented at all.
BRANCACCIO: On the contrary, Nessa Feddis says, her industry is being pro-active in helping consumers in distress.
NESSA FEDDIS: A lot of card companies aren't waiting for the customer to call them. They're actually reaching out to the customers that they've identified who may be struggling, and trying to work something out with them. Maybe lowering their interest. And sometimes forgiving some of the balance.
BRANCACCIO: Really? They're reaching out to lower rates?
NESSA FEDDIS: Yes—yes. It's going to depend on the—it's gonna be very individual, though.
BRANCACCIO: When we reached out to Bank of America for comment on their lending practices, they declined an interview but sent a statement: "We offer a number of tools to assist customers such as waiving or ceasing fees and reducing interest in connection with monthly payment programs."
But when Francine Adams called, none of these "tools" were made available. Unable to get help directly from the bank, Francine turned to a non-profit called Consolidated Credit Counseling Services based in Fort Lauderdale. Calls to Consolidated for help have jumped 80% in the last year.
Francine's counselors have analyzed her debt, and are now going to bat for her.
FRANCINE ADAMS: I've not used this card. All of that over the limit is all—fees and penalties.
BRANCACCIO: Critics say it's those fees and penalties that are pushing many people in debt over the edge. Many are so overwhelmed that they feel they have only one option left. We're talking about bankruptcy. There were over one million personal filings in 2008. That's an estimated 30% percent jump from the year before. And in Florida, the spike was even higher: over 65% more filings than in 2007.
Lillian and Anthony Alfano never thought they'd become a statistic, but they've recently joined the ranks of Florida residents whose financial difficulties forced them into bankruptcy. Their story also hinges on credit card debt, but it starts with a house, and an all too familiar scenario. Four years ago, like millions of prospective homeowners, Lillian and Anthony were given an adjustable rate mortgage.
ANTHONY ALFANO: We had no doubt that we'd be able at the time to re-finance because we assumed, obviously, that the—the value would—would keep if not increase.
BRANCACCIO: But in 2007, just as the low rate on their mortgage was set to adjust, housing prices across the country began to plummet.
LILLIAN ALFANO: We went to try and re-finance, and they said, "Well, you know, your house isn't worth that anymore."
BRANCACCIO: Refinancing their loan was not an option.
LILLIAN ALFANO: As the months went by, then our mortgage went up. So, we were paying that higher rate. It went up $500.
BRANCACCIO: Suddenly being asked to pay $500 extra a month is a big deal. I mean, imagine the car you could go out and buy that the payment would be $500 bucks a month, it's a nice car, I don't know what it is, it's probably like a Mercedes or something like that.
LILLIAN ALFANO: After the first four or five months that we were paying the $1,500. It went up to $1,800.
BRANCACCIO: Another $300.
LILLIAN ALFANO: Yeah, and then it went up again to, like, $2,000.
BRANCACCIO: The timing could not have been worse. Anthony's work for a construction company dried up and he could only find a job that paid less.
LILLIAN ALFANO: That's when we started using our credit cards again. After I paid the bills, then we would need food or, you know, gas.
JEFFREY TROMBERG: If you don't have the income, and you don't have the savings, and you don't have—family support to back you up, and you're fortunate enough to have a few credit cards with available credit, what are you going to do?
BRANCACCIO: Bankruptcy attorney Jeff Tromberg has seen hundreds of desperate families make the same gamble.
JEFFREY TROMBERG: You're gonna use those credit cards, and be optimistic, like everybody else is, that—that their incomes will increase, so that they can catch up on their credit cards, and—and—and pay them down.
BRANCACCIO: Did you ever total them all up at—at its worst?
LILLIAN ALFANO: I think it was thirty thousand. Thirty thousand dollars in credit cards.
BRANCACCIO: Lillian and Anthony say their financial situation went from bad to worse after one of their on-line payments arrived at the bank a day late.
LILLIAN ALFANO: They were like, "Well, sorry. Your interest rate is now 30 percent." You know, 29 percent, something like that.
BRANCACCIO: From what?
LILLIAN ALFANO: From zero! It was a zero percent interest rate card. And so then it went up to 30 percent. So, now they added interest on $8,000 or $10,000. I don't remember, but it was 30 percent interest.
BRANCACCIO: How would you be expected to pay off a card where ultimately you're only servicing the interest?
LILLIAN ALFANO: You're not.
BRANCACCIO: In fact, there's an argument credit card companies prefer it if you don't pay off the card. They can make more money from customers with higher interest rates on monthly payments that drag on and on.
ELIZABETH WARREN: That's exactly the sweet spot for the credit card companies. It's the person who—who can just barley make it, who's lost a job, who's having trouble finding another job, who—who diligently tries to pay, struggles to pay. Boy, that's the one you want. And that's the one you wanna hit with 29 percent interest. 'Cause you just keep ringin' those dollars out of 'em.
LILLIAN ALFANO: I called them, I tried to negotiate with them on, like, my cred—you know, I've never been late on a payment ever. And they wouldn't—they were, like, "Oh, no, sorry." They're like, you know, "You were late. It says that right there when you signed up for the zero percent interest that if you're late, the rate can go up."
BRANCACCIO: You were hours late. You weren't even, like, many days late.
LILLIAN ALFANO: Yeah, no.
BRANCACCIO: So, there wasn't a lot of flexibility there.
At the end of 2007, Lillian and Anthony took a hard look at their accumulated debt and realized they could never pay it off. They decided to declare bankruptcy.
Attorney Jeff Tromberg handled Lillian and Anthony's case. He, too, is seeing a big increase in filings.
JEFFREY TROMBERG: Congress may have made it more difficult to file bankruptcy, but people still get into debt, and they still need help.
BRANCACCIO: The Alfano's filed Chapter 13, which means that they are paying back some of what they owe the banks.
JEFFREY TROMBERG: They're not gonna get paid in full, but at the end of the plan, whether it's three, or five years, whatever they got they got. Whatever they didn't get, they're never gonna get. And the—the—the debtor gets what's called a discharge. So they —they are—they're free of that debt.
BRANCACCIO: Free of debt in three years, but they could not keep the house. Even with the bankruptcy adjustment, the mortgage was still out of their reach, and the Alfano's check the mail every day for the final eviction papers.
But in this era of bailouts for big lenders what are the chances of some relief for beleaguered borrowers? Barack Obama has been on this for a while. Last June, he held a roundtable on fixing the way we borrow.
BARACK OBAMA: For too long, credit card companies have been using unfair and deceptive practices to trick Americans into signing agreements they can't afford. And they're often filled with traps and fine print that only a credit card executive could understand.
BRANCACCIO: In the run up to the holidays, the Federal Reserve came out with the first major restrictions on card companies in three decades. Among changes, no raising interest rates on existing card balances until a customer falls behind 30 days on the payment. And bills would have to be sent earlier to give customers a better chance to pay by the deadline.
What do you make of those new rules?
NESSA FEDDIS: Well, the Federal Reserve has—is basing their decision on a lot of consumer testing. That's a good thing. We don't necessarily agree with everything they're doing. But, they've gone through their process. So, once it's adopted, move on.
BRANCACCIO: But these regulations won't go into effect for another year and half.
And in the meantime, Congress could press for tighter restrictions on cards. Congresswoman Carolyn Maloney of New York has been leading the charge, and last September, the House passed her credit cardholder's bill of rights by an overwhelming majority.
REP. CAROLYN MALONEY: I support credit cards that are fair and honest. They're part of our—-our—our financial system and what my bill does, the Credit Card Bill of Rights, is level the playing field between the card holder and the issuer. So that what you say in an application is actually the truth. And that you cannot raise rates unless people don't pay their bills on time.
BRANCACCIO: The reforms didn't make it to the Senate floor last year, but a new Congress is on the way and Maloney expects action.
REP. CAROLYN MALONEY: With all the stresses and strains that families are confronting, they don't need the added burden of unfair, deceptive practices of the credit card they own. Why can't we show them what the rules are upfront? And help them better manage their credit?
BRANCACCIO: Elizabeth Warren thinks a law would help, but a more enduring fix she says would be to create an agency—like the FDA or something—that stays up at night looking for ways to stop bad credit products from hitting the market.
ELIZABETH WARREN: You can't buy cosmetics with ground glass in them. You can't buy apples that have been sprayed with carcinogens. You can't buy infant car seats that collapse on impact. But, you can buy credit cards that will take a family that's makin' it month by month. And that card can explode on them and turn their financial lives upside down. We need the same, basic safety standards for credit products that we have for physical products.
BRANCACCIO: For now, the phones are running hot at Consolidated Credit Counseling Services, where Francine Adams is starting to see results. Washington Mutual has already responded to her counselor, with a new payment plan that works for one of Francine's cards.
FRANCINE ADAMS: Their letter said, "We understand that you have a life change situation." And they said, "We'll be happy to give you a payment of $58 a month. And you just continue to pay that until your account is paid off."
BRANCACCIO: And Bank of America has come around. Just days after our interview with Francine, the bank agreed to lower her interest rate.
You invested a lot of time and attention on trying o bring some order to your finances. Why are spending that amount of time? What are you fighting for?
FRANCINE ADAMS: I'm fighting to maintain my American dream. And I'm seeing now the way the economy is going even with the best efforts, people are falling along the wayside. And I don't want to become a statistic.
BRANCACCIO: As for Michelle and Andrew Spurlock, they have a new attitude towards their cards.
Do you still use your credit cards?
MICHELLE SPURLOCK: No. Uh-uh. We don't—we don't use them.
BRANCACCIO: What do you do when the mail comes and they're offering you new credit cards?
MICHELLE SPURLOCK: Shred them.
BRANCACCIO: Let me guess, you're probably thinking about your own credit cards right now. Get tips on protecting your credit and managing your cards from a financial professional. It's on our website. She'll also be answering your email questions. Pbs.org is the place to start.
And that's it for NOW. From New York, I'm David Brancaccio. We'll see you next week.
Elizabeth Warren on Credit Card 'Tricks and Traps'
Your Credit Card: What You Should Know
Credit Cards: You Asked, She Answered
Bank of America's Response to Our Show
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