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HEARING BEFORE THE NYC CONSUMER AFFAIRS COMMITTEE EXPERT TESTIMONY BY I welcome this opportunity to appear today before the Consumer Affairs Committee to address financial traps for unwary consumers around the Holiday Season as this topic is of critical importance to all New Yorkers. Given my experience studying consumer finance and consumer debt and my work on financial literacy education, I am particularly concerned about effects of financial traps and scams on the poor, on minority groups, on immigrants and on the elderly. Indeed, these groups are commonly targeted for predatory practices. So, while it is important for all New Yorkers to be vigilant with respect to holiday financial hazards, it is particularly important that those who are potential targets of unscrupulous behavior be on the look-out. At the holidays, it is easy to spend money. Retailers help us get into the holiday spirit by suggesting the importance of giving gifts in their advertising. Credit card companies also encourage us to spend over the holidays. The Federal Reserve just noted that holiday retails sales will match or exceed last year’s levels in New York. Nationally, online sales are expected to grow during this retail season. However, overspending and falling into financial traps at the holidays is a serious risk, particularly for those whose financial house is NOT in order before the start of the Holiday Season. The key is to spend reasonably and make wise financial choices. However, that task is not as simple as it appears. As a nation, we lack financial literacy skills and less than 5% of the population has the quantitative skills to compare and contrast credit card offers. Moreover, we do not have high personal savings rates so we have little to cushion us when we overspend, particularly if unexpected or unpleasant events intercede like job loss or family illness. Indeed, a sizable portion of lower income individuals are at least partially “unbanked” and do not use conventional banking services for all needed transactions. In addition, we underestimate the complexity of financial decision-making, often disregarding the impact of emotions, mood and attitudes on consumption choices. So, as much as we are tempted by the spirit of giving, a joyful holiday should not be followed by a terrible financial hangover in 2004. Unlike a real hangover, a financial hangover is not easily cured, and it can trigger a series of long-term consequences. These consequences can include negative entries on a credit report and a lowered credit score. Here is a list of eight common consumer traps that arise over the holidays. While these traps may seem obvious, they are not. Consumers are regularly asked to assess the merits of transactions but they do not have the financial skills nor the time and patience to read the small print. Moreover, while some of these traps are illegal, most are legal in the sense that no federal, state or local law is directly violated. One word of advice first: If something appears too good to be true, it probably is. The goal of retailers and many credit card companies is to move money from your pocket into their pocket. Certainly, spending and using credit is not all bad, and the holidays are a time to give to others. But consumers should make wise choices and not find themselves fleeced. EIGHT TRAPS (1) Be careful of seemingly beneficial “zero-interest" offers that stores offer to entice holiday purchasing. While these deals offer zero interest for a time period, how one repays in the future without incurring interest is tricky. For example, the timing of repayment and the timing of one’s credit card statement may not coincide, leading to an unintended obligation to repay interest. If one cannot pay in full at that time, the interest will accrue interest – which is costly. (2) Watch out for credit card companies that increase your spending limit so you can “enjoy” the holiday. This may seem like a nice “gift” but if you spend more than you can repay, this is a gift that bites. Moreover, increasing a credit limit unnecessarily can decrease one’s credit score which in turn can increase the interest rates one may be offered on future transactions, not a beneficial consequence. Contrary to popular belief, one can ask a credit card company to reduce one’s credit limit. (3) Decline offers to “skip” payments in December. This appears like another “gift” from retailers and credit card companies. However, while a person can skip the payment, the interest probably does not stop accruing and after the holidays, the amount owed will increase not just by the purchases made but by the accrued but unpaid interest on any unpaid sums. Then, if one cannot repay in full, interest accrues on the interest – an expensive result. (4) Watch out for and consider declining offers to transfer balances from one credit card account to another. This type of offer may have hidden costs and fees. Moreover, the promised low interest rate may only be in place for a limited period and the terms of the new credit card may be less beneficial than the card you have (for example, the new card may have no grace period). Finally, such a transfer could affect one’s credit score negatively. (5) Be careful before giving to charities (as nice as that is to do over the holidays) because “fake” charities are not uncommon at holiday time. Sadly, some companies are not legitimate, and they adopt names that are similar to legitimate charities. Make sure, too, that you are giving to charities where the monies go to those the charity is benefiting – not to administrative costs and high salaries. (6) Be cautious about your personal information, particularly your social security number, your bank account numbers and your credit card numbers. This is because the holidays are notorious times for identity theft – an increasing problem that can also seriously damage a consumer’s credit, at least over the short term. (7) Watch out for offers that say something like: “We’ll give you $25 if you spend $100.” This type of offer is a way of enticing you to spend more than you might otherwise spend – just to get the added $25. Moreover, if your purchases total just under $100, consumers are often encouraged to buy one more thing to reach the $100 limit. If you planned to spend the money at this store location in any event, then the offer may not be bad – just know your own limits and the reasons you are purchasing. (8) Giving a gift certificate may be the right present but not all gift certificates are the same. Some expire after a certain period of time and if they are lost, that too can be a problem. In addition, remember that many gift certificates are never used and the store has the benefit of the giver’s money until a purchase is made – if ever. As if this were all not enough, there is an additional problem. Knowing that people get into financial trouble over the holidays, organizations advertise to help consumers with their debt and credit problems. Unfortunately, even though some of these organizations state that they are not-for-profit organizations, which does not mean they are reputable. Make sure you go to a budget planner that is licensed by the New York State Banking Department. The 2003 holiday season is particularly crucial since we are moving out of a sluggish economy. But, despite the apparent economic improvement and increasing consumer consumption, bankruptcy filing rates are increasing as well. Since I do not want to put a damper on the holidays, I do have some suggestions for gift giving – gifts that grow and represent wise financial choices. For a younger child, a piggy bank with some starter money is a nice idea. Consider giving an older child a savings account with a small amount of money in it. A savings account is a particularly nice gift if the saving account uses a passbook. For couples or families that are saving for a big purchase (a car, a new appliance or even a house), consider opening a savings account for just that purpose and then buying a small toy representation of the item for which everyone is saving – as a reminder of why saving is so important. Consider games that signal wise money choices and teach money skills, for example, the Game of Life. This is a better choice than the game Milton Bradley electronic game called Mall Madness that encourages speedy spending in a pretend mall. Finally, consider a gift to a charity – a gift that keeps on giving. Biographical Information Karen Gross, a Professor of Law at New York Law School and President of the Coalition for Consumer Bankruptcy Debtor Education, is the award-winning author of Failure and Forgiveness: Rebalancing the Bankruptcy System (Yale University Press, 1997). She also has provided testimony to both Congress and the National Bankruptcy Review Commission, is Chair of the American Bar Association's Task Force on Data Collection in Bankruptcy, and is a former member of the Board of Directors of the American Bankruptcy Institute. The Coalition for Consumer Bankruptcy Debtor Education - which Gross cofounded to develop nationwide financial literacy programs - offers free financial management skills courses to individuals who have filed for bankruptcy relief in New York and trains lawyers, accountants, community leaders and bankers to become debtor educators. Its Web site, www.debtoreducation.org, provides consumer debtors with information and education they need as they restart their financial lives. Professor Gross can be reached at 212.431.2154 or e-mail: kgross@nyls.edu. Contact the Office of Public Affairs at 212.431.2872 or e-mail: publicaffairs@nyls.edu if you have any questions or are unable to reach Professor Gross directly. |