Proposed laws would end 'abusive' credit-card practices

In 2005, consumers enjoyed the use of nearly 700 million major credit cards in the United States, racking up $1.618 trillion in charges with 24.9 billion transactions.

Without question, credit cards play an important role in today's economy.

Yet over the past few years, complaints about unfair and deceptive practices in the credit-card industry follow on the heels of the mortgage lending crisis.

"In these tough economic times, it is more important than ever that we make sure that credit-card companies do not engage in abusive practices against their customers," says Rep. Paul E. Kanjorski (D-Pa. 11). "Consumers who follow the rules expect to be treated fairly by credit-card issuers. We, however, are seeing a surge in abuses from credit-card companies, making it more and more difficult for cardholders to control their accounts, decrease their balances and avoid problems with their credit."

The Federal Reserve proposed new rules in May to address some of those questionable practices. If adopted, the rules would stop many unjustified interest rate hikes on existing balances, ban charging interest on debt already paid off and require issuers to allocate cardholder payments more fairly. Some or all of the proposed changes are expected to pass in fall.

Some observers believe those rules do no go far enough to protect consumers.

"Still, more action is needed to protect the users of credit cards," says Kanjorski. "I often hear from individuals in northeastern Pennsylvania about the needless problems they have encountered as a result of questionable policies that protect the issuer of the credit card rather than the user of the credit card."
As a result, Kanjorski co-sponsored H.R. 5244, the Credit Cardholders' Bill of Rights Act of 2008, a bill that remains stalled in the House banking committee's subcommittee on consumer credit.

"Among other protections, this bill would help to shield cardholders from arbitrary interest rate increases, prevent cardholders who pay on time from being unfairly penalized and prohibit card companies from imposing excessive fees on cardholders," says Kanjorski. "This bill, which currently has the support of 150 members in the House, provides fair legislation to cut down on problematic and deceptive practices by issuers. It will better enable cardholders to ensure that they have full control of their accounts."
Credit-card controls represent the crux of a few other federal bills on the horizon. S.B. 2753 introduced in early March would set a cap on future interest rate increases and prohibit universal default, a practice where credit-card issuers raise rates when a cardholder's credit scores drop or when problems occur with another credit.

Another bill not yet introduced, The Credit Card Accountability and Responsibility Act, would address application of credit-card payments, interest rate hikes and other questionable practices.
Consumer groups across the country support the proposed rules and reforms.

"Currently when the credit-card company is going to change something on the consumer's account because of something that they feel the consumer has done, like paid late or their credit has deteriorated, in these two pricing scenarios, they don't have to tell the consumer," says Linda Sherry, director of national priorities for Consumer Action, a national nonprofit education and advocacy organization based in San Francisco. "What was happening was a lot of people were just one day or two days late and suddenly their interest rate was jumping three times what it was, up to above 30 percent."

The proposed federal rules would not allow companies to increase a cardholder's interest rate for late payment unless payment is 30 days late, require 45-day advance notice of any change in terms and change payment allocation practices.

For example, credit cards typically charge different interest rates for different usages such as cash advances, regular purchases and promotional balance transfers.

"Different portions of your balance have different interest rates," says Sherry. "They were applying the payment to the lowest interest balance so that it was allowing the higher interest-rate balances to compound more quickly. The Fed said that they should apply it to the highest interest rate balance right now, which is very helpful for consumers."

Sherry believes it has been helpful for consumers for the media to bring the issue of unfair and deceptive practices to the forefront, but others believe the media exaggerates the problem and fails to tell the whole story.

According to the Federal Reserve, only 7 percent of cardholders reported they hardly ever pay more than the minimum balance on their credit cards, meaning that 93 percent pay more than the minimum required or pay their entire balance in full. About 55 percent of consumers pay their credit cards in full every month, according to the American Bankers Association (ABA).

"The credit-card interest rate is something you earn by your past habits," says John Hall, ABA spokesman. "You are paying for your risk level. They are trying to change the laws so you can't price people for risk and saying you can't change an interest rate once you get it. That goes against the whole model of a credit card. If any individual takes out three additional cards and runs those right up to the limits, your risk profile has changed. So it should be allowed for those lenders who loaned you this money up to now to be able to change that rate accordingly."

Bad credit choices such as making late payments or exceeding card limits create many of the penalties, fees and charges incurred by those who manage their credit irresponsibly.

"This is a small minority that we would be legislating and changing an entire industry for, and it would harm people who have good credit scores because they are going to wind up paying for all these who are priced accordingly," says Hall. "If you take that away that revenue stream from those people, if they are not having to pay for that risk yet they still want the card, how does that get resolved?"

In a highly regulated industry, Hall believes consumers already receive adequate protections.

"Do I think consumers need better protections?" asks Hall. "There are so many in place right now, no. We feel there is plenty on the books. Could things be explained better? Yeah. One thing we do agree on is the disclosure can be better and can be improved. Many of the disclosures written for credit cards are written with litigation in mind because unfortunately there are enterprising attorneys out there looking for opportunities for class actions. It's written with lawyers in mind, so it's very difficult for people to navigate."

Successfully navigating through the world of credit cards has created another debate between the need for stronger regulations and the need for financial literacy. The perfect balance may provide the answer.