Consumers Skeptical About New Credit Card Regulations

After years of complaints against the credit card companies for unfair and deceptive practices, the federal government approved sweeping new restrictions on credit card companies on Dec. 19. Consumer responses to the measure, however, show that many remain skeptical about the long-term benefits of the changes and strongly disapprove of the 18-month delay in implementation.

Many comments echoed the sentiments of one poster: "When was the last time Barnes & Noble called you up and said they wanted more money for the book they sold you last month? Have you EVER paid in full for a computer or a cd player or a shirt and later received a letter telling you the price was actually 500 or 1,000 percent more than what you had agreed to pay and you had better fork over the bucks? Credit card companies are not our friends; they should not be taking taxpayer hand-outs; they should not be permitted to abuse the citizens of this country. Further, I am SHOCKED that the new rules will not take effect for eighteen months. There is literally NO COST involved in effecting them NOW."

Another wrote: "These rules and regulations need to be implemented NOW, not almost two years from now. What a joke as the ripoff continues. How come the Wall Street bailouts always take place immediately, why do new taxes always take place immediately, but when it comes to given [sic] Main Street some help it always takes years from the time they pass the new rules."

Under the new regulations, banks, credit unions and savings associations are prohibited from raising interest rates on existing balances unless a payment was received more than 30 days late; charging a late fee if a borrower was given less than 21 days to pay; and applying payments in a way that would result in debts with higher interest rates getting repaid last. It also protects consumers against predatory credit cards that reduce available credit to subprime borrowers through fee harvesting.

"I believe the eighteen month grace period was a compromise," one commenter wrote. "This timing could make the regulations toothless. The potential is the banks will cull all accounts, reduce or eliminate available credit for millions, raise interest rates to 29.99% or higher for most people, raise late and overdraft fees to $50 or more, and use their current “contract” to extract as many dollars as possible from cardholders. When the new regulations go in effect they will have us where they want us."

The issue of consumer protection from credit card industry practices will continue to remain a priority in the Senate, according to Sen. Christopher Dodd (D-Conn.). In a recent Washington Post article, he is quoted as saying, "To restore our economic stability, we must stop credit card companies from ripping off their customers and driving them into deeper and deeper debt…While I expect the Federal Reserve's rules to be a significant step forward in addressing this issue, I believe we need a strong law in place to protect consumers from unfair credit card practices including 'anytime any reason' rate increases, universal default, excessive and unreasonable fees, and marketing targeted to young consumers."

The $970 billion industry stands to lose about $10-12 billion in annual revenue as a result of these changes. The banks have provided dire warnings about the measures, citing a probable decrease in the amount of available credit that would be extended to consumers and increased difficulty in qualifying for new credit.

But most agree with one poster's sentiments that the changes are long overdue: "Too little too late. Where was Congress when these scummy vultures were robbing the American public for the past 10-20 years? And why do they have 18 months to continue robbing us? Maybe to have more time to find loopholes and new ways to screw the public? Look, it's no secret any more that a large part of most banks revenues and profits come from usurous [sic] fees and bogus penalties. They have to find a way to continue to rob the public along these lines. And Congress has to give them time to find those ways so the campaign contributions continue to roll in."

Capital One Under Fire in California

The credit card giant Capital One, which has been in the crosshairs of consumer advocates for years, is mired in more lawsuits.

Lawsuit #1:

California Attorney General Jerry Brown has been eyeing Capital One for nearly two years, investigating the company for possible violations of the state's unfair business practices and false advertising laws. In November 2006, Brown first requested "books and records… and interviews with employees" due to "substantial concerns about the credit card practices of Capital One," including solicitations for credit card applications mentioning balance transfers and accounting closing practices.

The attorney general made subsequent requests for information as part of its ongoing investigation – to no avail. Capital One's response? They filed a lawsuit this month claiming that as a national bank, only the U.S. Office of the Comptroller of the Currency can examine its records or take any enforcement actions. Never mind the fact that when Brown made his requests, Capital One was NOT a national bank. In fact, according to Reuters, it wasn't until March 2008 – 18 months after the attorney general made his first request - that Capital One converted its Virginia charter to that of a national banking association.

Lawsuit #2:

Former Capital One cardholder James Krider has filed suit in the U.S. District Court, Central District in downtown Los Angeles, against Capital One and the three major credit bureaus over post-bankruptcy false credit reporting. Seems that Capital One continued to report three credit cards that had been discharged in his bankruptcy filings. After months of disputes, Capital One insisted it had the right to continue to report his discharged accounts as "delinquent" on his credit reports even though the debts had been discharged through the bankruptcy.

According to Krider's attorney, Robert Brennan (Brennan, Wiener & Assoc.), "a growing number of banks and credit card companies have quietly been 'pushing the envelope' on credit reporting of bankruptcy-discharged debt, hoping to pressure consumers who have recently been through bankruptcy to pay these debts.

"I admit, I am not proud of having to declare bankruptcy, but the bankruptcy notation on my credit reports is bad enough and that will be there for 10 years," Krider said in a press release issued by his attorney. "Having the credit card companies continue to report my old credit cards as still delinquent is doubly bad and makes it that much tougher for me to get back on my feet."

Krider is seeking money damages as well as a permanent deletion from his credit reports of any delinquent reporting of any accounts included in his bankruptcies.

The case is expected to go to trial in February 2009.

The Fed Proposes Aggressive Restrictions on Abusive Credit Card Practices

In a move that is stunningly pro-consumer, the Federal Reserve Board has proposed tough new policies to curtail the types of abusive credit card practices that have been the subject of recent Congressional hearings.

These practices, which include arbitrary increases in credit card interest rates for existing balances, applying payments only to balances with the lowest interest rate rather than the highest rates and double-cycle billing (charging interest on debt that has already been paid), would be changed under the new, stricter policies. In addition, banks may also be required to give customers advance notices as well as the ability to opt out of overdraft programs.

The rules could go into effect by the end of this year.

The banks are already in an uproar over the proposed rules, which could affect more than 10,000 financial institutions. Industry representatives have begun threatening exhorbitant annual fees, elimination of balance transfers and increased interest rates. According to lobbyists, the restrictions would eliminate credit or make it more expensive to get credit.

The biggest source of angst for banks is the issue of universal default, which allows banks to increase a customer's interest rate for any reason, including defaults on other credit cards or loans, slight drops in credit scores or an increase in banks' cost of funds.

Eliminating universal default, known in bank lingo as "risk-based repricing," is a key component of a number of bills on Capitol Hill. The Fed's proposal would allow banks to raise rates when a consumer defaults on that account, and to consider "outside factors" to raise rates for new transactions. However, banks would not be allowed to use such factors to raise rates on existing balances.

According to On Wall Street, Citigroup and JPMorgan Chase & Co. announced they would no longer do universal default; however, Bank of America still uses risk-based repricing, and Capital One reprices its customers when their cost of funds rate increases.

Consumer advocates are applauding the Fed's aggressive stance. A vote is expected today.

Rep. Maloney Introduces Credit Cardholders' Bill of Rights

The wave of legislation designed to protect consumers from unfair credit practices continues in the House of Representatives. Yesterday, Rep. Carolyn Maloney (D-NY) introduced the "Credit Cardholders' Bill of Rights Act of 2008" (H.R. 5244), which aims to amend the Truth in Lending Act and abolish predatory lending practices and abuses.

The Bill of Rights includes provisions that:

• protect cardholders against arbitrary interest rate increases (such as universal default and "any time any reason" price hikes) and require a 45-day notice of any interest rate increases
• prevent cardholders who pay on time from being unfairly penalized (eliminating double-cycle billing and fees on interest-only balances)
• protect cardholders from due date gimmicks (requiring card companies to mail statements 25 days before the due date - 14 days is the current minimum - and prohibits charging late fees if provided with proof of mailing the bill within 7 days of the due date)
• shield cardholders from misleading terms (such as "fixed rate" vs. "prime rate")
• empower cardholders to set limits on their credit (creating a self-selected credit limit that cannot be exceeded, thereby eliminating over-the-limit fees)
• require card companies to fairly credit and allocate payments (many card companies require that payments be allocated to lower interest rate balances first)
• prohibit card companies from imposing excessive fees on cardholders (limits the number of over-the-limit fees to 3)
• prevent card companies from giving subprime credit cards to people who can't afford them (requiring that fees for subprime cards whose total fixed fees over a year exceed 25% of the credit limit be paid upfront before the card is issued)
• require Congress to provide better oversight of the credit card industry (improves data collection on industry profits and fees, and provide an annual accounting to Congress)
• contain NO rate caps, fee setting or price controls (a concession to the card companies)

Maloney, who chairs the House Financial Institutions and Consumer Credit Subcommittee, said, "A credit card agreement is supposed to be a contract, but in recent years cardholders have lost the ability to say no to unfair interest rates hikes and fees." The bill "levels the playing field between card companies and cardholders while fostering fair competition and free market values. It sets no rate caps, fees or price controls, nor does it dictate any business models to card companies."

Credit & Predatory Lending: Hillary's Plan

Did you know:

• Americans have a record $940 billion in revolving debt, and the average person carries up to nine different credit cards. (Federal Reserve, 2007)
• The average family carries thousands in credit card debt; over 10% of credit card users carry a balance of $10,000 or more. (Fair Isaac, 2007)
• Low-income credit card holders pay (on average) the highest starting interest rates - and are more than twice as likely to pay penalty interest rates than those with the highest incomes. (Demos, 2007)

With the current economic pressures causing rising foreclosure rates due to resetting mortgages and increasing costs for essentials - food, health care, education and energy- credit health is becoming a hot election issue.

On the heels of Barack Obama's Five Star Plan, Hillary Clinton unveiled a Fair Credit for Families Agenda, which seeks to address predatory lending and expand access to fair credit. The plan includes measures to:

• Impose a 30% cap on annual interest rates for credit cards and work toward a lower cap. (A GAO survey found that up to 25% of credit cards issued by banks charged penalty rates over 30%.)
• Prevent credit card companies from unfairly increasing interest rates or charging interest in unfair or unreasonable ways, such as universal default clauses, applying new interest rates to old transactions, and collecting interest on late penalties. Credit card companies would have to apply payments to the portion of the outstanding balance with the highest interest rate, and only be allowed to collect interest on the unpaid portion of the previous month's bill (for example, if you pay off a $500 balance, you should not have to pay interest on that $500 balance the following month).
• Require that credit card companies provide clear, easy-to-understand information about credit card terms and fees. In 2006, the credit card industry collected $97 billion in interest charges and $18 billion in penalty fees. (CardTrak, 2008)
• Create a new Financial Product Safety Commission to police credit products in the wake of declining regulation for credit card companies and banks.
• Crack down on abusive payday lenders and refund anticipation loan providers, many of whom charge excessive fees.

Your Credit Mama is not here to stump for any political candidate. But she does urge you, her family of readers, to look at your own credit situation and hold your elected leaders - whoever they are - accountable for making sure all Americans have fair access to credit on reasonable terms.

A Five-Star Plan to Reduce Predatory Credit Cards

On the campaign trail, Democratic presidential hopeful Barack Obama is attacking predatory credit cards.

Last month, Obama and fellow Senator Ron Wyden (D-RO) introduced legislation designed to educate and protect consumers from abusive lending practices, while providing incentives to credit card issuers to improve their practices.

The Credit Card Star Safety Act of 2007 (S. 2411) awards "stars" to each card based on a points system. Cards with fair and friendlier terms and conditions are awarded more stars, with five stars given to the safest cards. These star ratings would be required on all marketing pieces, agreements, statements and applications. The idea is that consumers would naturally gravitate toward using the cards with more stars, creating competition among credit card companies to keep and attract new customers by changing abusive practices.

The rating system doesn't measure how good the interest rate is, but rather the safety of the credit card agreement itself. For example, card issuers that state they can change the terms of the credit agreement "at any time" without notice or employ "fee harvesting" techniques would earn one star. Those that provide 90 days' notice to cardholders before changing their terms, or have agreements that are easy to understand, would earn more stars.

This program is based on the success of the five-star crash test ratings system for new cars. Initially, no car was given more than two stars; today, a number of vehicles are earning five stars. While most of the credit cards today would probably rate an average of one to two stars, Obama and Wyden expect this program will have a similar, positive impact on credit card practices.

It's a pressing issue that many voters can relate to. According to data from the Federal Reserve and the U.S. Census Bureau, in September 2007, U.S. consumers were carrying close to $880 billion in credit card debt – nearly $2,900 for every man, woman and child in the country. Credit card debt has increased by almost $163 billion since 2004, an increase of over $500 per person in the U.S., or 23% in just 3 years.

When Good Payers Get Screwed

You are one of the "responsible" ones.

You have a few credit cards with decent rates. And you've always paid those bills on time.

So you don't think twice about that holiday discount offer - you know, the one where you can save an additional 10-15% on your purchase if you open up a department store credit card. Your credit is good - you are approved!

The next month, you get your credit card statements and fall out of your chair. Your credit card issuers have just raised your interest rates!

How could this happen when you've always paid your bills on time?

In yet another example of abusive credit card industry practices, big financial companies have adopted policies where they can bump up a consumer's interest rate for their credit card when their FICO score declines - even if they have never paid late on that card. Mind you, your FICO can decline when you do something as simple as open a department store credit card.

Members of Congress are currently investigating this and other abusive practices. The subcommittee found that in many cases, consumers have little notice of the increased rate, which are automatically triggered by declines in FICO scores "for reasons left unexplained."

Five big financial companies issue around 80% of credit cards in the U.S. -- Bank of America Corp., Capital One Financial Corp., Citigroup Inc., Discover Financial Services LLC, and JPMorgan Chase & Co.

One week prior to the Congressional subcommittee's hearing on the issue earlier this year, Citigroup suddenly announced that it would no longer make "any-time-for-any-reason" increases to interest rates and fees charged to customers, at least until a credit card expires and a new one is issued (usually in two years). JPMorgan Chase followed suit, saying they also will discontinue the practice.

But legislation may still be needed to get other companies to do the same - and at least mandate that credit card issuers give customers adequate notice (at least 45 days) of terms and rate increases in language that can be understood by a fifth-grader.

Beware of Predatory Credit Cards

So let's say you're one of the millions of Americans with weak or non-existent credit. You're desperate to rebuild your credit history, since you know that poor credit leads to higher rates for mortgages, auto loans, insurance and can even affect whether or not you land that job you want. You've heard that one way to rebuild a weak or non-existent credit history is by signing up for a credit card and making small purchases, repaying the debt on time every month.

Somehow these banks seem to know that you want credit - you've received e-mails and offers in the mail. Lured in by promises of credit lines up to $2,000, you apply for a credit card. Congratulations- you're approved! You're a little disappointed that the limit they give you is just $250. It wasn't as much as you'd hoped for, but it's a start.

What you probably didn't do, though, is ask about the TERMS. And you soon discover that your $250 credit line is actually much less, because by merely signing up for the card, you incurred $178 of instant debt due to all those fees that you didn't know you'd be responsible for. There's a $95 program fee, a $29 account set-up fee, a $6 monthly participation fee, and a $48 annual fee. If you didn't realize that your actual buying power was really just $72, you might buy something that causes you to go over your limit - which, of course, generates yet another fee.

This is just one example of "fee harvesting," a practice by which credit card companies pile on junk fees to unsuspecting consumers - typically low-income, fixed-income and minorities. It's a lucrative business, generating millions in fees for companies and billions of dollars of debt for consumers.

A report issued by the National Consumer Law Center details how banks and marketers take advantage of inadequate laws and weak oversight by regulators by selling these predatory cards. The biggest offenders named in the report include CompuCredit, Urban Trust Bank, South Dakota-based First Premier and First National of Pierre, and Delaware-based First Bank of Delaware and Applied Bank (formerly known as Cross Country Bank), Capital One and HSBC.

They'll tell you their mission is bringing affordable banking services to the underserved. But what they are really doing is profiting from the poor and desperate.

The root of the problem lies in regulatory and legal loopholes that allow this practice to continue. I don't advocate cutting off people's access to credit. Rather, we need tougher federal controls. Until Congress acts to protect consumers from fee harvesting and other predatory practices, you must protect yourself.

The smaller the print, the more important it is to read it. Before you agree to anything, ask to read the terms. If you don't understand the terms, ask someone you trust to explain them to you.

Remember, if it seems too good to be true, it probably is.

Listen to NPR's report: Low Wage America - Credit Card Companies Abuse the Unwitting.