February 09, 2010

In early May the Federal Reserve issued a series of new proposals designed to curtail some of the more egregious credit card industry practices, while also requiring card companies to better disclose their rules to customers.

As Federal Chairman Ben Bernanke stated, the proposed new regulations are “intended to establish a new baseline for fairness in how credit card plans operate. Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”

Amen.

Of course, the Fed’s new proposed regs would have been a lot more helpful if they came long before we got to our current national credit card crunch: More than $900 billion in outstanding card debt, much of it accruing interest at rates well above 15% and susceptible to arcane rules and practices that generate major fee revenue for the card companies.

Give the Fed
Your Two Cents

Not surprisingly the financial services industry is rather annoyed with the Fed’s action. We are now in the midst of a 75-day comment period—due to expire in mid July—before the regulations will be finalized. You better believe the financial services lobbyists are going to work overtime to chip away at these consumer protections that will mean less revenue for their clients (the card companies.)

That’s why I encourage every one of you to make sure the Fed hears from consumers. Don’t think that your voice matters in Washington? Well in the official statements that accompanied the release of these proposed new regulations the Fed specifically referred to the input they received from more than 2,000 individuals (not lobbyists, consumers!) who let the Fed know what they considered the most egregious of credit card practices. Consumers were definitely heard at the Fed. And now you need to weigh in one more time to make sure the regs don’t get watered down. Deliver your comments online here.




To contact your Senators about the Credit Card Accountability, Responsibility and Disclosure Act, go here.

To contact your Representative about the Credit Cardholders’ Bill of Rights Act of 2008” (H.R. 5244) go here.

But I suppose we will have to be grateful for “better late, than never.” And the Fed’s proposed rule changes do indeed offer some solid consumer protections:

  • Credit card issuers will not be able to arbitrarily increase a the interest rate on your card. There would have to be a concrete reason for raising the rate, such as the cardholder to make a minimum payment by the due date, or a change in the underlying index used that is used to set the interest rate.
  • Speaking of due dates; statements will have to be mailed at least 21 days before payment is due, rather than the current 14-day minimum. This is designed to make it less likely that credit card issuers can catch cardholders off guard by moving up a due date so the cardholder ends up making a late payment. At an average $39 per late fee, it’s easy to see why card companies have been happy to push customers into being late.
  • Card issuers would be prohibited from using your payments to only pay down your balances with the lowest interest rate. This practice has been a credit card company favorite: Lure new customers in with a low intro rate for a balance transfer, but then impose a high interest rate on new charges or cash advances. Then when the cardholder makes a payment, it is credited to the low-rate balance, rather than having any of the payment used to pay down the higher-rate debt. In other words, the card company just keeps charging you more and more on your growing high-rate debt. The new reg would require that at least a portion of every payment be credited to your high-rate debt.
  • The two-cycle billing system would be abolished. This practice, used by many card issuers, creates a higher balance due for cardholders who only have an unpaid balance from time to time.

Congress Takes Hold of Card Problems

More action on credit card disclosure and practices may come from Capitol Hill where two bills in the House and Senate are focused on boosting consumer protections. Granted, this is just the sort of topic that scores well in an election year; but let’s cross our fingers and hope this is more than vote-pandering.

I was beginning to give up on Congress. A year ago it held hearings to learn more about credit card billing practices. No legislation ever came out of those hearings. The only small victory was that a few of the major credit card issuers hauled before Congress to testify tried to play nice by voluntarily rescinding their use of Universal Default. That’s the system whereby you can pay your credit card bill on time, yet still see your interest rate skyrocket if the card issuer happened to notice you didn’t pay any of your other bills-completely unrelated to your card company-on time. It looked like the credit card industry had succeeded in throwing this one bone to Congress and consumers to avert any more substantive changes to how the credit card industry is allowed to operate.

Then this past February, Representative Carolyn Maloney introduced the Credit Cardholders’ Bill of Rights Act of 2008. And then at the end of April Senator Christopher Dodd introduced the Credit Card Accountability, Responsibility and Disclosure Act (the C.A.R.D. Act). These bills include some provisions that are echoed in the proposed Fed regulations. Consumer advocates believe it important to build on the Fed’s regulations by having actual law in place that mandates consumer protections. (Laws are harder to change than regulations.)

I was especially interested in a few new items in the Senator’s bill that the Fed did not address.

  • Require card companies to show accountholders the total time and total expense they will incur if they choose to only pay the minimum balance due each month. I think putting those figures front and center would wake up a fair amount of people. I would have liked it if this proposal went one step further: show how much both the time and total payment would decrease if the cardholder paid 1%, 2% and 3% more than the minimum amount due each month. Show those figures side by side with what happens if you pay just the minimum and you have an easy-to-see motivation for paying more each month.
  • Curtail credit card companies from proactively pushing credit card offers on consumers under the age of 21. Under the new bill, those young adults would have to initiate contact with the card company to apply for a card.

Again, I encourage anyone who wants better disclosure of credit card fees and a push for a more level playing field to contact your Washington representatives and tell them what you think of both of these bills. This isn’t just a matter of telling your representatives you are annoyed with something; you have specific bills you can refer to, and ask their position on. Wouldn’t you like to know where your Representative and Senators stand on credit card reform?

To contact your Senators about the Credit Card Accountability, Responsibility and Disclosure Act, go here.

To contact your Representative about the Credit Cardholders’ Bill of Rights Act of 2008” (H.R. 5244) go here.