Between 1989 and 2007, Americans’ overall credit card debt grew from $211 billion to $960 billion, up nearly $100 billion since just the end of 2006. According to the U.S. Better Business Bureau complaints about the credit card industry are the third highest source of consumer complaints after cellular phone services and new car dealers. And the Philadelphia Inquirer recently reported the latest abomination: without warning, banks are tripling a cardholder’s interest rate, to levels as high as 32 percent. Late fees, which averaged about $10 a few years ago, have risen as high as $39.
Americans are hurting. Wages remain stagnant, families are being thrown out of their homes, workers are losing their jobs, health care costs continue to skyrocket, and college tuition has become a luxury many Americans families can no longer afford. So how did the credit card industry treat their customers in response to the greatest economic crisis since the Great Depression? By expertly – and deceptively – taking advantage of the public’s growing desperation for increased credit by employing complex pricing structures, resulting in a maze of exorbitantly high interest rates and exploitative fees difficult even for the most educated consumers to understand.
The Reintroduction of the Credit Cardholders Bill of Rights
Last year, one of the most important Federal consumer protection bills in recent memory – “The Credit Cardholders’ Bill of Rights Act” (H.R. 5244) – won approval in the House of Representatives by a vote of vote of 312 to 112, with 84 Republicans joining Democrats to support the bill.
The vote represented an enormous victory by consumer, civil rights, labor and community groups over the largest banks in the world on a regulatory issue that is at the core of their income. Unfortunately, the Senate did not have the time to bring it to a vote last year, perhaps in part due to a promised veto by then President Bush.
But times have changed, and in January of 2009, Congresswoman Carolyn B. Maloney (D-NY), Chair of the House Financial Institutions and Consumer Credit Subcommittee reintroduced the Credit Cardholders’ Bill of Rights Act in the House as H.R. 627 (read David Lazarus’s op-ed in the Los Angeles Times on Senator Chris Dodd’s similar attempt to regulate the credit card industry) .
H.R. 627 would:
• Prevent card companies from unfairly increasing interest rates on existing card balances – retroactive increases are permitted only if a cardholder is more than 30 days late, if a pre-agreed promotional rate expires, or if the rate adjusts as part of a variable rate.
• Require card companies to give 45 days notice of all interest rate increases so consumers can pay off their balances and shop for a better deal.
• Prevent companies from charging “over-the-limit” fees when a cardholder has set a limit, or when a preauthorized credit “hold” pushes a consumer over their limit.
• Limit (to 3) the number of over-the-limit fees companies can charge for the same transaction (i.e. for obtaining a cash advance, making a late payment, exceeding the credit limit on an account) – some issuers now charge virtually unlimited fees for a single limit violation.
• End unfair “double cycle” billing – card companies couldn’t charge interest on debt consumers have already paid on time.
• If a cardholder pays on time and in full, the bill prevents card companies from piling additional fees on balances consisting solely of left-over interest.
• Many companies credit payments to a cardholder’s lowest interest rate balances first, making it impossible for the consumer to pay off high-rate debt. The bill bans this practice, generally requiring payments to be allocated proportionally to balances that have different rates.
• Among other measures, requires card companies to mail billing statements 25 calendar days before the due date (up from the current 14 days), and to credit as “on time” payments received by 5 p.m., local time on the due date.
• Establish standard definitions of terms like “fixed rate” and “prime rate” so companies can’t mislead or deceive consumers in marketing and advertising.
• Give consumers who are pre-approved for a card the right to reject that card prior to activation without negatively affecting their credit scores.
• Prohibit issuers of subprime cards (where total yearly fixed fees exceed 25 percent of the credit limit) from charging those fees to the card itself. These cards are generally targeted to low-income consumers with weak credit histories.
• Prohibit card companies from knowingly issuing cards to individuals under 18 who are not emancipated minors.
Although the Federal Reserve issued a rule in late 2008 that would prohibit many of the same unfair practices the bill would address, the rule does not take effect until July 2010, giving credit card companies ample opportunity to continue to rip off consumers as they face unprecedented economic hardships. H.R. 627 on the other hand would take effect within 3 months of the President signing the legislation into law.
America’s Credit Card Debt Crisis: The Next Subprime-Like Meltdown?
A 2007 report from Demos (so these numbers have surely gotten significantly worse since then) – a non partisan policy center – entitled “Borrowing to Make Ends Meet”, details the erosion of American household economic security in the last decade and makes clear why H.R. 627 is so necessary. Key findings from the report provide a stark portrait of the depth of America’s current credit card debt crisis using the most recent data from the Federal Reserve Board’s Survey of Consumer Finances:
• From 2001 to 2006, homeowners cashed out $1.2 trillion in home equity, often in an effort to cope with mounting credit card debt and to cover basic living expenses (2006 dollars).
• Nearly six out of 10 households with credit cards revolved (i.e. carrying a balance from month to month – leading to ever increasing debt due to high interest rates) their balances in 2004. The average amount of credit card debt among those households reached an all-time high of $5,219, an increase of 89 percent from $2,768 in 1989.
• From 1989 to 2004, the percentage of cardholders incurring fees due to late payments of 60 days or more increased from 4.8 percent to 8.0 percent.
• In 2004, 46 percent of very low-income (under $9,999 per year) credit card-indebted households spent more than 40 percent of their income to pay off debt.
• From 1989 to 2004, credit card debt among very low-income households quadrupled from an average of $622 in 1989 to $2,750 in 2004.
• While white households carry more credit card debt, African Americans and Latinos have a higher percentage of credit card-indebted households. In 2004, of those with credit cards, 84 percent of African-American households and 79 percent of Latino households carried credit card debt compared with 54 percent of white households.
• Over 90 percent of African-American families earning between $10,000 and $24,999 had credit card debt.
• Since 1989, Americans in the age group of 65 and over have experienced the greatest increase in the amount of credit card debt carried. The average balance for this age group increased 194 percent from $1,669 in 1989 to $4,906 in 2004.
CFC Supports Tough Regulations of All Predatory Lending Practices
At a time when our economy sits on the brink of collapse, and millions of consumers face record debt and the likelihood of foreclosure, the Consumer Federation of California (CFC) remains strongly supportive of reigning in the abusive and predatory practices of the credit card industry. H.R. 627 is a big step towards leveling the playing field between borrower and lender by putting an end to some of the most arbitrary and unfair credit card lending practices that trap consumers in an unending cycle of debt.
H.R. 627 represents a long overdue effort by Congress to address what is rapidly becoming a second “subprime like meltdown” that could send our economy into an even deeper recession – if not depression. Neither Congress nor the California Legislature acted quickly or boldly enough to deal with the subprime meltdown – and their failure has been catastrophic to millions of American households. If passed by Congress and signed by the President, the pain of the coming credit card crisis may at least be softened – while marking the first time in our nation’s history usurious credit card lending practices would be curbed.
Tamara Draut, Vice President for Policy and Programs at Demos, summed up the importance of this legislation, stating “America’s families are facing a dire economy, and this bill couldn’t come at a better time. As the consequences of the subprime meltdown spread, banks are openly increasing interest rates and fees on their credit card customers in order to cover losses in other areas. The only reason this is possible is because in the absence of almost any regulation, issuers have tilted the playing field heavily in their favor.”
Deregulation and the Creation of a Predatory Industry
How did we get into this mess? The answer to that question should sound familiar to anyone that has followed the subprime mortgage crisis, the Wall Street collapse and the subsequent bailout of the banks: a deregulated lending environment gave these companies free reign to construct the terms, rules, and practices of the credit card agreement without meaningful regulation. The industry has used this unfair and undeserved advantage over the consumer to generate outlandish profits at the expense of increasingly indebted American consumers.
CFC is urging California’s representatives in both the House and Senate to heed the call of the 80 to 90 percent of Americans – depending on the poll – that believe credit card practices are unfair, as well as the record 56,000 consumers that flooded the Federal Reserve Board with credit card complaints urging the adoption of the Board’s proposed credit card rule.
Call Your California Representative and Urge Them to Support H.R. 627!
Zack Kaldveer works for the Consumer Federation of California, http://www.consumercal.org/ a non-profit advocacy organization. Since 1960 CFC has testified before the California legislature on dozens of bills that affect millions of consumers. CFC also appears before state agencies in support of consumer regulations.
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