Overview
Credit card companies use a variety of unfair practices to trap
consumers in a cycle of over-priced debt. The companies are allowed by
regulators to raise your rates for any reason, including no reason.
They are allowed to operate nationally out of states, like Delaware and
South Dakota, with weak consumer laws and no limits on interest rates
or fees.
Consumers
should either pay balances in full, or make the largest payments they
can afford, and always pay early in the cycle to avoid late fees. But
for years the firms lowered minimum monthly payments and encouraged the
use of cards for everyday expenses—through rewards programs—so that
many consumers accumulated massive amounts of credit card debt. Until
recently, a consumer who owed credit card debt of $5,000 at a common
16 percent APR, who only made the typical 2 percent minimum payment, would take 26
years to pay off the card, even if it was cut up and never used again.
Even the federal regulators finally took notice, and recently ordered
banks to increase minimum payments by a modest amount.
In
2005, Congress passed punitive legislation long sought by the powerful
credit card industry to make it harder and more expensive to file for
bankruptcy, and to force consumers to pay off more credit card debt if
they do so.
The
new law includes a weak yet-to-be-implemented disclosure of
how many years it will take to pay off the card if you only make the
minimum requested payment. S 393, the Akaka Credit Card Minimum
Payment Warning Act, would replace that industry-approved disclosure
with a specific, customized warning.
Although
the ability of states to regulate the fees and interest rates (APRs) of
credit card companies has been severely restricted by federal
preemption doctrine, which has allowed the weak laws of Delaware and
South Dakota to override the state laws where credit card customers
live, states are taking action in one area. In response to the growing
problem of aggressive credit card marketing to young people on college
campuses, some states, such as California, have restricted campus
credit card marketing. Several colleges and universities have taken
similar actions at the local level. See the U.S. PIRG report,
"Graduating Into Debt: Credit card marketing on college campuses," for
more information.
While legislation to
rein in the credit card industry has been stymied by bank campaign contributions
over the past decade, we are making enormous progress. Recently, the House and
Senate have held many more hearings than in past Congresses.
U.S. PIRG supports
the following comprehensive reform bills and several other bills as
well.
Rep. Carolyn Maloney
(D-NY)’s Credit Cardholders Bill of
Rights, HR 5244, which has over 80
co-sponsors:
Highlights:
-Bans imposing new penalty interest rates (of as much as
36% APR) retroactively on old balances when rate raised due to late payment to
someone else or decline in credits core, not delinquency on the card itself
(consumer is in good standing with card). This practice by banks is called
universal default).
-Bans changing terms of card for any reason including no
reason (all companies do this now
-Requires payments mailed at least a week in advance to
be considered on time (no late fees can be
charged).
The Senator Bob
Menendez (D-NJ) Credit Card Reform Act, S
2753, which includes bans universal default, includes a number of
other strong provisions such as a limit on retroactive interest charges and caps
on penalty fees. The bill also gives consumers under the age of 21 the right to
choose whether to receive credit card solicitations. Card issuers could only
solicit young consumers if they receive affirmative consent in
advance.
Senator Carl Levin’s
Stop Unfair Practices in Credit Cards Act, S.
1395, which is a strong bill out there. Highlights:
-- Bans universal
default. If card is paid as agreed, interest cannot be raised on previous or
future balances.
-- If the consumer
is in default to the bank itself, the bill limits penalty rate increases to: (1)
seven percentage points above the current interest rate; and (2) future credit
extensions only.
-- Bans fees to pay
by phone and reverses current bank practice of applying payments to lowest APR
balance. (If a consumer’s balance is tied to several APRs -- often a balance
transfer is at 0% APR -- but purchases and cash advances are at much higher
rates, your entire payment currently only goes to the lowest balance only, if
you only make a partial payment.)
