Are Credit Card Companies creating a Legal Liability for Inappropriately Issuing Accounts?

Are Credit Card Companies creating a Legal Liability for Inappropriately Issuing Accounts?

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Adam J. Goldstein, who works for a Chicago law firm, wrote in the recent issue of University of Illinois Law Review his beliefs that credit card companies are encouraging high levels of consumer debt because they take advantage of a "consumers' cognitive and behavioral vulnerabilities."

We all see an onslaught of credit card offers that arrive in the mail every day. Sometimes it is for a new credit card or checks for cash advances. It seems like these offers along with low interest promotional rates for transfers are luring people into further debt.

Goldstein points out that other lending activities, such as for a car, house, or other loans are all put through a credit screening process. These very same banks also offer credit cards which are loans. The credit card loans are at a higher rate. Goldstein said in this report that "people with bad credit histories, as well as those who have declared bankruptcy or who have an income level that is too low to justify the credit lines that they are given, all receive high-interest credit."

The National Bank Act of 1864 has made it exempt for national banks to abide by state consumer-protection laws that limit the interest rates charged to the resident. Credit card companies are also exempt of the state’s laws for debt-collecting and credit-reporting standards.

Goldstein also points out that the marketing and incentive programs lure consumers into overspending and cause them to go into debt. The effects of carrying the burden of debt cause health problems. Goldstein references a 2002 medical study; there was a link to credit-card debt and health problems including insomnia, anxiety, marital breakdowns, and depression.

Credit-card debt also extends difficulties to the college student. Because of easily accessible credit-cards, college students can easily sink into debt. Goldstein reports that college students that carry the burden of credit-card debt can lead to having low grades and withdrawal from school. After school, debt ridden college student may also have a problem finding employment because credit checks may report bad scores.

Goldstein said that there is no other consumer credit that has this problem of creating debt. He believes that credit cards accumulate debts for consumers in the US. He writes, "This indicates that there is something singular about the design of credit cards that uniquely causes people to accumulate too much debt."

Many consumers spend on small $20 - $30 purchases and after a while the bill adds up to thousands of dollars. Credit cards help to increase a person’s ability to impulse buy.

Goldstein criticizes credit card companies into luring consumers with low introductory interest rates. Once the promotional period expires, the interest rate goes up considerably. He writes, "It is these high, long-term interest rates that result in faster debt growth and accelerate negative social and individual consequences of such debt."

The average US household has an estimated $12,000 in credit card debt. Consumer credit lines have tripled from $777 billion in 1993, to over $3 trillion in 2000.

Goldstein puts forth the ideas that credit card companies could be a product liability because of defective design. On of these defects it the use of the minimum monthly payments which high interest rates on outstanding debt benefits the banks.

"Because the goal of products liability is to force manufacturers to internalize the costs associated with product risks, it follows that credit-card features that have minimum payment structures should be recognized as defects," Goldstein concluded.

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