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:
- No more "arbitrary" rate increases. Rate increases are allowed only if customers pay their bills over 30 days late, a promotional rate expires, the rate is variable, or cardholders don't follow through on a payment agreement.
- Plenty of warning. Credit card companies are required to give at least 45 days' notice for interest rate increases or significant fee changes.
- No more tiny print. All disclosures must be written in at least 12-point font.
- No surprise "over the limit" fees. Only customers who sign up for this service can be charged for it.
- High-interest debt is paid off first. Credit card companies will no longer be allowed to apply payments to the debt with the lowest interest rate first; instead, payments will go toward the most expensive debt.
- Protections for college students. The bill restricts credit lines to $500 or 20 percent of income, whichever is higher, for people under the age of 21.
- No credit for teens. Card companies are prohibited from issuing cards to anyone under the age of 18 (emancipated minors are excluded from the restriction).
- No more murky wording. "Fixed rate" and "prime rate" will have standard definitions.
- More time to make payments. Card companies are required to mail bills to customers 21 days before the due date (an increase from the current requirement of 14 days). They must also accept payments as on time if the due date falls on a Sunday or holiday and the payment is received the following day.
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.
In general, Plunkett says, research shows that consumers pay attention to three things when they get a new card: the annual fee, any rewards, and the initial interest rates. But the problems that consumers run into relate to the much more complicated pricing policies, such as late fees, over-the-limit fees, and unexpected interest rate increases. "The best-educated consumers have still fallen victim to the traps and tricks," he says.
Meanwhile, credit card companies are increasingly worried about their own financial situations. Several issuers have reported charge-off rates, the percentage of loans that companies don't expect to get repaid, of over 7 percent. Analysts say that number could get as high as 10 percent by the end of the year.