One of the most important Federal consumer protection bills in recent memory – “The Credit Cardholders’ Bill of Rights Act” (H.R. 5244) – won approval last night by a vote of 39-27 in the US House Financial Services Committee. This represents 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 – marking the second defeat for the credit card industry in the past few weeks. The bill now moves to the floor of the House of Representatives for an historic vote in the next few days.
If enacted, H.R. 5244 would help tens of millions of Americans avoid increasing and undeserved debt while beginning a long overdue effort by Congress to prevent a second “subprime like meltdown” that would send our economy into an even deeper recession. The source of this emerging economic meltdown is our nation’s growing credit card debt crisis – and H.R. 5244 (D-Maloney) marks the first time in our nation’s history legislation is being considered that would curb predatory credit card lending practices.
The Consumer Federation of California strongly supports “The Credit Cardholders’ Bill of Rights Act” because it would reestablish the fundamental principles of fairness and fair play to an industry that has become synonymous with deception and greed. CFC has joined forces with the coalition leaders of this effort, including the Consumer Federation of America, Consumers Union, SEIU, and USPIRG (among others) in calling on the House to approve this critically important legislation.
California’s 8 Congressional Representatives on the Financial Services Committee split their vote, with the 4 Democrats voting “Yes” and the 4 Republicans voting “No”:
Voting YES on H.R. 5244 (Pro-Consumer)
Voting No on H.R. 5244 (Pro Credit Card Industry)
California State Legislature Inaction and the Need for H.R. 5244
According to Americans for Fairness in Lending, in California the average median amount of revolving debt per person (i.e. 95% of which is credit card debt) was $1657. Unfortunately the State Legislature has done next to nothing in addressing the predatory lending practices of the credit card industry – making H.R. 5244 all the more important for California consumers.
California college students are especially vulnerable – and experience some of the most deceptive and aggressive credit card industry sales techniques. In 2000, Governor Gray Davis vetoed one of the few attempts made by the state legislature to take on credit card companies. The bill (D- Joseph Dunn) would have required all California State Universities and Universities of California to “adopt policies to regulate the marketing practices used on campuses by credit card vendors.”
The problem of student credit card debt was a serious one at that time, and has become exponentially worse in California today. A new report by CALPIRG found “the average student receives nearly 5 credit card offers a month and nearly two in three students reported that they had at least one credit card. Fifty-five percent of cardholding students said they used their card for day-to-day expenses. Reflecting escalating college costs, 55 percent said they charge their books and nearly one-quarter said they pay their tuition with a card. On average, freshmen had a balance of $1,301 and seniors had more than twice that, $2,623.
Credit cards are marketed to students using free gifts and introductory teaser rates. The use of aggressive marketing techniques obscures students’ ability to be scrutinizing consumers when considering a credit card contract. Seventy six percent of students reported stopping at tables on campus to apply for credit cards, and nearly one-third were offered a free gift to sign up.”
America’s Growing Credit Card Debt Crisis
U.S. consumers charged more than $1.8 trillion to over 691 million credit cards in 2005. In 2004, the revenue generated from credit card fees alone was $24 billion. According to the Federal Reserve, consumers pay at least $85 billion annually in interest on credit card and other revolving debt. The average household with debt carries approximately $10,000-12,000 in total revolving debt and has approximately nine cards. Americans now owe a staggering $915 billion in credit card debt, over triple the amount in 1989.
A 2007 report from Congresswoman Carolyn B. Maloney’s office entitled, “Forever in Debt Anti-Competitive Credit Card Practices and their Impact on the Economy” found that credit card debt is increasing and American consumers are increasingly “using their credit cards to stay afloat”.
• Revolving credit debt during the first quarter of 2008 was $956.6 billion.
• About half (46.2 percent) of U.S. households held credit cards with balances, according to the 2004 Survey of Consumer Finances (SCF).
• Among these households, the median revolving credit card balance was $2,200.
• A large share of disposable income goes to service overall debt—14.1 percent in the first quarter of 2008.
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: 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 Americans.
And Americans are hurting. While wages remain stagnant, gas prices are skyrocketing, families are being thrown out of their homes, workers are losing their jobs, and health care coverage has become a luxury item many Americans can no longer afford. The credit card industry has become experts at taking advantage of this need for increased credit by employing complex pricing structures, resulting in a maze of exorbitantly high interest rates and exploitative fees difficult even for highly educated consumers to understand.
Anti-competitive Credit Card Practices
Congresswoman Maloney’s report meticulously lays out the myriad of ways the credit card industry hoodwinks the consumer – thereby trapping them in an inescapable cycle of debt. Some of the “conditions” that many consumers unknowingly agree to include:
• Applying fees or penalty interest rates as high as 30 percent if cardholders pay late or exceed credit limits.
• Raising a cardholder’s interest rates for actions the consumer takes with other creditors, including utility companies, or mortgage lenders.
• Allowing issuers to increase their interest rates at “any time, for any reason,” which may leave the credit cardholder scrambling to find another credit card to transfer the balance on the credit card that just increased its rates.
• Charging interest not only on the current balance due, but also on the previous month’s charges – otherwise known as. “double-cycle” or “two-cycle” billing. This occurs even when the previous month’s balance has been paid off and creates a large burden on consumers whose balances fluctuate from month to month.
The report concludes with the following sobering analysis:
“The current economic downturn poses a significant threat to the well-being of American families, who are likely to rely more heavily on their credit cards to make end meet. As credit card indebtedness rises and families find themselves under increasing financial difficulty, practices by credit card companies are adding to household’s financial distress.
As the complexity and availability of financial instruments have increased, new consumer protections have become increasingly important—not just for families, but also for the economy. As credit card defaults increase, the risks to the already weakened financial system will grow. Moreover, unfair practices by card issuers will cause families to spend more to service their debt, instead of making new purchases that would boost our sagging economy. The unchecked practices by credit card issuers will only exacerbate the current financial crisis.”
H.R. 5244: Establishing Common Sense Consumer Protections
CFC believes it would be unconscionable to sit idly by while credit card companies bleed working families dry precisely at a time they face unprecedented economic hardships.
H.R. 5244 would curb abusive and unfair credit card lending practices by:
• Stopping unjustifiable interest rate increases on existing balances by banning the practice in cases that are based on the consumer’s supposed problem with another creditor or a drop in their credit score even though they are meeting their obligations with their credit card company.
• Ending bait and switch contract clauses in which issuers give themselves the right to raise fees or interest rates at any time for any or no reason.
• Requiring that cardholders be given a 45-day notice of any interest rate increase on an account.
• Preventing issuers from playing costly games with consumer payments by requiring them to ensure that cardholders receive the full benefit of any promotional low interest rate offer that is made by requiring issuers to apply payments to the highest interest rate balance in these situations.
• Stopping “double cycle” billing, which requires consumers to pay interest on debts they’ve already paid off.
• Prohibiting the marketing and sale of credit cards to children under 18, thereby protecting a generation of young Americans from being locked into debt by the credit card industry.
By no means is H.R. 5244 a perfect bill. Additional provisions that would enhance consumer protection not yet addressed include: a ban on universal default rate hikes; a prohibition on retroactive application of any rate hike to prior balances; a ban on over-limit fees when the transaction exceeding the limit is approved by the issuer; a requirement that the size of penalties charged by issuers be directly related to actual costs incurred; and protections against low-credit, high-fee cards.
Nonetheless, it would institute a host of critical consumer protections while establishing a long overdue precedent which makes clear that the credit card industry is no longer immune to basic government over-site and regulation.
CFC is urging California’s Congressional Delegation to heed the call of the 80 to 90 percent of recently polled Americans that believe credit card practices are unfair, as well as the record 44,000 consumers and counting that have flooded the Federal Reserve Board with credit card complaints urging the adoption of the Board’s proposed credit card rule.
Call Your California Congress Member – Urge Them to Support H.R. 5244
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.