Credit Card Reform

New Credit Card Reforms Aim to Protect Consumers, Lessen Debt

The rising debt of the average adult in the United States is no secret, and paired with the mortgage crisis and credit crunch, the economic outlook is less than rosy. Lending practices by credit card companies have enabled consumers to spend beyond their means, and many people have fallen into the fine-print trap as these companies raise interest rates and change the terms of the credit contract, further increasing the debt.

However, two proposals – the Credit Card Reform Act of 2008 and the Credit Cardholders’ Bill of Rights – have been introduced to the House and the Senate to combat the increasing levels of credit card debt, unfair credit card practices and deceptive credit offers.

Practices Under Question
The new legislation brings to light various practices in the credit card industry that are considered unfair, ranging from hidden fees and penalties to changing an interest rate with minimal notice. The Consumers Union, the publisher of Consumer Reports, has identified the top unfair credit card practices that are piling on the debt.

1. Universal Default is the practice of monitoring your credit report under a “universal default clause.” Essentially, the company keeps tabs on your behavior with other creditors and if they deem you a credit risk or your credit score decreases – regardless of on-time payment history – they can boost your interest rate.

2. Change of Terms is a fine-print phrase that states “We reserve the right to change the terms (including the APRs) at any time for any reason,” meaning that an interest rate is in constant flux and can be changed with just 15 days notice.

3. Teaser rates are a method of getting a consumer to apply for a card with a great APR, but little do applicants know that the rate can be hiked to 30 percent or more shortly after signing up with only 15 days prior notice. The low rate expires, but charges have been made to the card, and the new interest rate is applied to the balance.

4. Minimum payment is a schedule created by the credit company to keep consumers paying the high interest rates. For example, it would take someone making the minimum credit card payments on a balance of $1,000 and an APR of 15 percent almost nine years to pay off the total. Additionally, the total cost, thanks to accrued interest, would be close to $2,000.

5. Payments and billing cycles are changing, which means the card statement is sent closer to the payment due date. A late fee can be charged even if your payment was mailed before the due date, and late payments can also prompt an increase in the interest rate.

6. Penalty fees and service charges can be tacked on for various reasons, whether it’s a late payment, you exceed your line of credit or pay a bill over the telephone. Instead of automatically rejecting your card when the limit is reached, issuers extend the line and add on an extra charge, which can be as much as $39 for each occurrence. Credit companies also charge for services that were previously standard, such as paying a bill over the phone and sending a year-end summary.

7. Balance transfers also tend to add to the debt level. Consumers can transfer a balance from one card with a high APR to a card with a lower rate, but payments made on the balance will first apply to the amount with the lower rate. In essence, the card company pays off the 0-percent transfer balance – the old balance – while new purchases rack up interest at a high rate, such as 18 percent.

Elements of Reform
Thanks to the legislation, there is hope and protection for consumers who need to rein in their credit card debt, as well as preventative measures to keep additional debt from incurring. The major points of the credit card reform are as follows.

• Prohibiting the solicitation of consumers under age 21. Credit card companies could only target this audience if they receive affirmative consent in advance.
• Issuers could not continue to charge higher interest rates on charges that were made prior to the rate increase.
• Written consent must be given to the card company before the credit agreement is changed in anyway, which prevents the increase in rates and fees “at any time, for any reason.”
• Penalty fees must relate, in a reasonable manner, to the costs that the card issuers incur if a late payment is received or a cardholder exceeds his or her credit limit. The late-payment interest rate increase would be limited to seven percent, and late fees could not be assessed on payments that are postmarked by a specific date.
• Universal default would be outlawed, and an interest rate could not be adjusted based on a cardholder’s standing with other creditors.
• Card issuers would be unable to issue credit or raise credit limits without first determining if the consumer can make the monthly payments based on income, financial obligations and employment.
• Lenders would be required to issue a “firm offer of credit,” meaning that teaser rates could not be used as incentive to open a new card.

Tips to Protect Yourself
Until the new legislation is agreed on and passed, there are a variety of ways that consumers can protect themselves from unfair credit practices and lessen their credit card debt.

• Make monthly payments more than the minimum amount
• Take the time to review each month’s statement and know where fees are added 
• Know the terms and conditions of your contract, including the fine print.  
• Don’t use cash advances or convenience checks
• Sign up for a card that doesn’t have an annual fee
• Be aware of “default interest,” which is when the interest rate rises thanks to missed payments, bounced checks or over spending
• Avoid cards that use double-cycle billing, which incurs interest on the original balance from the previous month, even if the majority of the total balance was paid off

Sources:
Consumers Union: http://www.consumersunion.org/
Experian: http://www.experian.com
The Dough Roller: http://www.thedoughroller.net
Leader of the bill, Sen. Robert Menendez: http://menendez.senate.gov/