I have a stellar credit rating, over 770, never had a late pay, etc. You can imagine how stunned I was when I received a letter from one of my credit card companies telling me that my current interest rate (8.99%) was being raised to 29%! Of course, I do have the option to
“opt-out,” pay off my current balance (which is zero) at the current interest rate and then have the card cancelled.

This is happening everywhere, to people with stellar credit ratings and to those who have been a little shaky. Who isn’t a little shaky in these trying times?

It’s obvious that the banks are worried that people will default on their credit cards, so to prevent that, they are raising the interest rates to the roof. This is exactly the kind of wrong-headedness and moronic thought processes that got the banks into the sub-prime mortgage crisis and which will precipitate the next crisis of massive credit card defaults.

Imagine you have a credit card with a $10,000 balance at 8.99%. You’re paying $100 a month and making slow headway. The bankrate.com calculator says you’ll crawl out from under that debt in seven years.

Now imagine your most wonderful, most loving and understanding credit card company suddenly raises your rates to the stratosphere. You may or may not be given an “opt-in” offer to have your credit shut down, freeze your current interest rate and have your account closed when the balance is paid.

At 29% interest, you’ll never pay off your debt at the rate of $100 a month because your payments will not even cover the interest. In order to make any headway, your payments will be raised to at least $250 a month. At that rate, it will take you nearly 12 years to erase the debt.

For argument’s sake, let’s continue with the imaginary scenario that you have just been given notice that you are being laid off.

Your top priorities are (and should be) to keep your car, so you can travel to a new job, and your home. Other priorities are obviously food, utilities and medical insurance. Where do those already unaffordable $250 a month credit card payments fall? You’re right: At the bottom of the list.

Your thinking process goes something like this: You need a car to get a new job and that has to the the most important thing in your life. If you default on your credit card, your credit will be in the toilet for seven years, but you’ll still have the necessities of life: car, house, food, etc.

What choice do you think you (and most people) will make? You’ll grit your teeth, default on your credit cards and let your credit rating suffer.

It’s not pretty, but these hard economic choices are being made every day all over the country.

What does this mean for the credit card companies and the big banks that own them?

It doesn’t take an MBA from Wharton to figure out that the $25 trillion we collectively owe in credit card debt is going to drag down the fearful and greedy banks that are forcing so many to make the difficult decision to default.

And it doesn’t take a crystal ball to see the banks once again crying for a government bailout.

And should we give to them?

NO WAY!

The banks are precipitating this situation. They started 15 years ago when they started shoving credit cards at us and encouraging us to spend more and more and more. Now they are bringing this festering boil to a head by raising interest rates to impossible levels.

What should you do if you’ve gotten one of these letters? Accept the opt-in, which will freeze your rates at their current level. Keep your payments current and take the minor hit you’ll have on your credit rating when the account is closed when you have a zero balance. (By the way, you can’t make any new charges on the card if you accept the opt-in.)

What should the government do to stop the next bank crisis before it hits? Congress should immediately pass legislation regulating credit card interest rates for all banks receiving federal bailout money. Retroactive rate increases for customers who are current on their accounts should be prohibited. Higher interest rates on new purchases should be regulated at reasonable levels, say at 15% or less.

Contact your senator and representative today and tell them the banks have to reined in again before they cause a second crisis which could be the killing blow to our economy.

This is usury, pure and simple. Worse yet, these panicked interest rate hikes are certain to become a self-fulfilling prophecy which will ensure more bank failures.