As a columnist for the South Florida Sun Sentinel, the newspaper of record for Broward County, Michael Mayo is a fairly astute fellow. But that hasn’t made him immune to credit card issuers pulling the rug from under him. This past April he posted the following tale of personal woe:

“I got a letter from Bank of America the other day. The fine folks at Bank of America wanted to let me know that they were raising my credit card interest rates.

Currently, the card has an 8.9 percent fixed annual rate on purchases. I have a credit line of $13,700 and a balance of $1,004. I’ve never been late with a payment.

The fine folks at Bank of America, who’ve spent the last few years buying up failed institutions like Countrywide and Merrill Lynch and taking some $163 billion in taxpayer bailout pledges, let me know that as of May, my interest would change to a variable rate of 14.65 percent annually.

From a fixed 8.9 percent to a variable 14.65 percent – such a deal!”

Complaints like these are cropping up around the nation with a depressing frequency.

Tens of millions of Americans with checking, savings and credit card accounts are learning first-hand the meaning of what MSNBC.com columnist Bob Sullivan calls “gotcha capitalism.” It’s a modern variation on the Chinese “death by a thousand cuts.” Banks and other financial institutions in recent years have raised existing fees to dramatic heights, imposed a broad range of new fees, doubled and even tripled interest rates on credit cards without prior warning and otherwise put the squeeze on unsuspecting customers.

The spate of major bank failures and federal bailouts over the past year hasn’t stemmed these predatory practices. Legislation might, and even then only up to a point. This May, Congress amended the Truth in Lending Act in ways that would curb abusive practices by credit issuers. Yet Georgetown University law professor Adam Levitin and many other industry observers believe that once the law fully takes effect next summer, credit providers will find ways to circumvent the law.

Capitalism’s superiority over socialism by now ought to be an accepted fact. An economy only can function under a system of contractual exchange between buyer and seller, a relationship that socialism at best grudgingly concedes or denies altogether. Yet for precisely this reason, capitalism can be sustained only through a high degree of public trust. When trust breaks down, offending firms and industries must rebuild their reputation to remain competitive. The banking industry, to make a long story short, has a credibility problem right now.

Nothing makes institutional borrowers more irate, and untrusting, than the experience of being nicked with sudden, exorbitant penalties and interest rate increases. A search of almost any financial website these days will turn up comments by responsible borrowers, for the most part with no political axe to grind, bitter over their treatment by creditors. One response to Mayo’s article stated:

"My Juniper card went from 16.99 percent to 27 percent with the option of canceling if I reject the terms. My Capital One [card] went from 13 percent to 18 percent with the exact same option to reject. I have been late maybe twice in the past 10 years. However, the increase has not mentioned this in the explanation. Congress needs to do something. People are struggling too and bankruptcies are imminent for both the consumers and financial institutions."

Here’s another unhappy camper:

"I have several credit cards and have never been late or missed a payment to any of them. Due to economic times, I do carry a balance though. My Chase card decided to raise my rate from 9.99 percent to 29.99 percent and won’t provide me with a reason! They did, however, raise my credit limit by $3,000.00, which I promptly declined. Every month I call and have finally gotten it down to 15.99 percent now that it is almost paid off."

These complaints are legitimate and impossible to ignore. For decades, lenders, in a coordinated fashion, have aggressively raised existing service fees, while imposing new ones on services long considered gratuities. The collapse and subsequent federal rescue of major banks did not halt this process. Banking industry consultant R.K. Hammer estimates that credit card issuers as a whole in 2009 will rake in $20.5 billion in penalty fees, up from a record-high $19 billion in 2008. And Moebs Services, a Chicago-area economic forecasting firm, projects that bank and credit union overdraft revenues this year will reach $38.5 billion. “Fee income is basically where banks and credit unions can offset both loan- and investment-related losses,” notes CEO Michael Moebs.

Banks and other credit providers justify such measures as a response to market conditions. On one level, they’ve got a point. According to the Fitch Credit Card Index, accounts delinquent by at least 60 days constituted a record-high 10.4 percent of the dollar value of outstanding loans for June. More than $70 billion of credit card debt may wind up uncollectible by the end of the year. “I think when you look at the whole – all the fees overall – the landscape has changed and that has meant rising costs for our industry,” notes Bank of America Senior Vice President for Communications Anne Pace. “For the bank to continue offering competitive products and services, and making sure we are lending responsibly in the current environment, we have to adjust our prices.” A spokesperson for Capital One Bank likewise recently noted: “We’ve had to rethink risk. It’s a challenging environment.”

But a “challenging environment” is nothing new. The Great Depression was nothing if not challenging, yet banks back then didn’t treat their customers as cash cows to be milked dry. Here’s one indicator of something gone wrong: The number of complaints about credit card practices to the Better Business Bureau rose to 8,988 in 2008, a rise of 17 percent over the previous year. Younger readers might not fathom this, but as recently as 30 years ago – the onset of a serious recession – many U.S. banks charged only $2 for a bounced check. And credit card issuers imposed very small late-payment and over-the-limit fees, if any at all. The practice of slapping insufficient-funds, over-the-limit, and late-payment fees of $30 or more appears to defy logic. The main idea behind the banking industry’s massive automation push during the Eighties, after all, was to reduce the cost of individual transactions and to pass along the savings to customers.

What happened, unfortunately, was that banks, savings & loans, credit unions and finance companies, spurred by government deregulation on one hand and mandates to lend to “underserved” populations on the other, took on increasingly risky investments. Their actions included short-sighted mergers and acquisitions, massive loans for speculative real estate projects and, more apropos, issuance of credit cards to people with a poor or nonexistent credit history. Solvent or not, lenders came to see penalty fees as a lucrative way of realizing untapped sources of revenue to cover losses. Last year’s mortgage failures, which triggered a worldwide capital constriction not seen in 75 years, did not dull the appetite for this revenue, especially as the federal government bailed them out anyway. Continued...