Credit card companies are on notice: Congress may soon pass a law that will require them to end arbitrary rate increases, more clearly explain the costs of making minimum payments, and limit certain fees, among other changes. The House has already passed a version of the bill, sponsored by Rep. Carolyn Maloney, D-N.Y., and the Senate is expected to vote on a slightly different version later this week.
The bill appears poised to pass into law at a time when consumers are growing increasingly frustrated with rate increases and cuts to credit limits that many credit card companies have been imposing in response to the financial crisis. President Obama has expressed his support for the legislation and urged swift passage. Last week, the Federal Reserve reported that consumer credit card debt continues to fall; in the first quarter, it decreased at an annual rate of 6.5 percent. The drop is most likely due to a combination of consumers cutting back on purchases and reduced access to credit lines.
The House version of the bill codifies many of the changes the Federal Reserve already plans to implement next year. Among the changes:
The Senate's version, which is being spearheaded by Democratic Sen. Chris Dodd of Connecticut, has not been finalized, but it currently contains stricter regulations than the House bill. It bans double-cycle billing, in which card companies charge interest on portions of balances that were already paid off on time, and limits rate increases to instances where the customer is more than 60 days late on payments. It also includes limits on credit offered to young people.
Members of the credit card industry say enhanced regulations will force them to restrict the credit they offer and to raise interest rates on all consumers, arguing that the focus instead should be on financial literacy. Marwan Forzley, chief executive of E-commerce payment provider eBillme, supports the proposed legislation but says that consumers need to be more aware of payment options that are not based on credit and that better education about how the credit system works would provide a more holistic solution to the problem of consumer debt.
The problem with the "financial education is the answer" argument, says Travis Plunkett, legislative director of the Consumer Federation of America, is that it assumes the problem is with consumers, not with the way credit cards currently work. "Credit card companies have introduced complexity into the way they price their products knowing that consumers won't understand it," he says. He adds that even Harvard law attorneys who teach contract law have said they don't understand their credit card agreements.