Some say credit card rule isn't enough


December 18, 2008

Even as regulators rein in some of the most egregious credit card practices, consumer groups and legislators warn that more needs to be done -- and quickly -- to protect the most vulnerable consumers.

A rule -- to be issued Thursday by the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration -- is expected to restrict issuers' ability to raise credit card interest rates for any reason and curb the fees charged to borrowers with tarnished credit records. Ken Clayton, senior vice president of card policy at the American Bankers Association, says the measure will "directly address all the concerns that Congress and others will raise ... and fundamentally rewrite the way card companies and consumers interact." But consumer groups argue that the rule is unlikely to restrict how much banks can charge, their ability to pull back on consumers' credit limits -- hurting their credit scores -- and their aggressive marketing to college students.

The expected implementation date of mid-2010 is also troubling, experts say, because banks are likely to continue their aggressive rate and fee increases until that time as they grapple with ballooning losses on mortgage loans. "If the Fed delays the effective date for a year from now, that will be too late for many consumers," warns Lawrence Ausubel, an economics professor at the University of Maryland. "There are certain to be an increased number of troubled consumers next year who will be entrapped by late payments and the resulting increases in interest rates."

A threat to the economy

USA TODAY, in its Credit Trap series, found that as borrowers struggle to stay afloat, banks are aggressively raising rates and fees, often stripping consumers of what little disposable income they have left. That threatens to accelerate the downturn, because consumer spending makes up more than two-thirds of U.S. economic activity. The paper's investigation also revealed that during the housing boom, banks sharply raised card limits in part because of a surge in home equity, then guided borrowers to use mortgages to pay off card balances. And the series found that banks' practice of packaging and selling credit card debt to Wall Street has given them a powerful incentive to raise card rates and fees. Regulators' new rule on credit cards is an "excellent first step," because banks can't double your rate if you pay one day late, says Gail Hillebrand, senior attorney at Consumers Union, the publisher of Consumer Reports. "But it's not enough."

At one time, credit cards were subject to usury laws in 50 states that generally capped interest rates at 12 percent to 18 percent. A 1978 Supreme Court decision changed that, ruling that a bank could charge the maximum rate allowed by the state where it had its headquarters. States such as South Dakota and Delaware removed their interest rate caps after the ruling, and banks flocked there so they could charge higher rates. Then came the barrage of fees. The Supreme Court ruled in 1996 that credit card fees were "interest" charges, again subject to state law where the bank is headquartered. That basically gave banks freedom to expand and raise credit card fees as much as they wanted, experts say. "Banks in a very devious and sinister way drove the battleship through the opening and went from a reasonable $10 to $40 late fee within three or four years," says Duncan MacDonald, the former Citibank group counsel who represented Citibank in the 1996 Supreme Court case.

Over the years, as banks realized that consumers shopping for a credit card paid close attention to upfront rates -- but not fees -- card rates began falling and a bevy of fees cropped up to take their place, MacDonald notes. Still, those fees are completely avoidable, says Clayton, of the American Bankers Association. Credit cards are a "great value that helps consumers address everyday issues and longer-term challenges," he adds. Now, as the economy falters, banks have become even more aggressive about increasing borrowers' credit costs, advocates say. Banks are not only raising credit card rates on consumers who pay their bills on time, but they're also imposing higher fees, and doing so more often. Legislators and advocates point to hair-trigger changes in credit card terms as a reason why a law, rather than just a regulation, is needed to reform the industry. "The Fed can give, and the Fed can take away," says Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group.

Law vs. regulation

To restore economic stability, says Sen. Chris Dodd, D-Conn., the public needs a law to "stop credit card companies from ripping off their customers and driving them into deeper and deeper debt." Meanwhile, Rep. Carolyn Maloney, D-N.Y., who sponsored the Credit Cardholders' Bill of Rights, said that she will review the new rule and "see what remains to be done to protect consumers from unfair and deceptive credit card practices." While reform won't help borrowers who have already gotten their rates increased, at least it will give them better options the next time they're shopping for credit, says Linda Sherry of Consumer Action, an advocacy group.

Credit card fees, rates and more

26.9 percent -- Average penalty rate

$25.90 -- Average late fee (1)

$29.13 -- Average over-limit fee (1)

$43.50 -- Average annual fee (1)

$32.03 -- Average returned payment fee (1)

77 percent -- Percentage that say they change card APR terms at any time, for any reason (2)

45 percent -- Percentage that raise interest rate due to record with other creditors (2)

23 days -- Average grace period (3)

71 percent -- Percentage that require arbitration to settle disputes (4)

1 -- for issuers with these fees; 2 -- based on 22 banks responding; 3 -- based on 41 cards surveyed; 4 -- based on 38 cards surveyed.

Source: Consumer Action survey of 41 cards from 22 financial institutions conducted Feb. 26 to April 9.