The Credit Card Accountability, Responsibility, and Disclosure Act expands consumer protections for people using credit cards. The legislation bans credit card companies from using double-cycle billing, a practice card companies use to charge interest on debts that have already been paid on time, and limits universal default, which increases the interest rate on a credit card based on information unrelated to that card (for example, whether a consumer has paid other bills on time). The Act generally prohibits retroactive application of interest rate increases and, along with restricting certain fees, mandates that fees and charges that result from violations of credit card agreements be “reasonable and proportional.” When consumers have more than one card balance, card payments must be applied first to the balance with the highest interest rate. The legislation prevents card companies from permitting transactions that would result in over-the-limit charges, unless a consumer specifically requests that the company do so.
The Credit Card Accountability, Responsibility, and Disclosure Act expands the information that card companies must provide to consumers, including improved disclosure of due dates and late payment penalties, notice of interest rate increases 45 days before the increase, and the period of time it would take to pay off a card balance if only minimum monthly payments are made. Rules for issuing credit cards to people under 21 are included, along with clarification of rules for on-time bill payment. Finally, the Act regulates gift certificates, prohibiting expiration dates less than five years after a card is issued.
The Middle-Class Position:
Middle Class Supports. Many middle-class Americans rely on credit cards to meet daily expenses. Revolving debt – which mostly stems from credit cards – has increased 66% since 2000 . 80% of U.S. households have at least one credit card and more than 55% of households carried an outstanding balance in 2004. Since credit is increasingly necessary to fund a middle-class standard of living, credit card companies have been able to take advantage of their customers. As credit has become scarcer and card companies more concerned about maintaining their bottom line during the financial crisis, card companies have hiked interest rates even on cardholders with excellent credit.
Consumers have been slapped with excessive and obscure fees and interest charges that, if they are explained at all, are described in small text and confusing language. It is now common practice for credit card companies to apply finance charges twice in a billing cycle (double-cycle billing); to raise interest rates on a credit card for credit problems not associated with that card (universal default); to charge multiple over-the-limit fees; and to apply payments on balances with multiple interest rates to the balance with the lowest rate, all practices banned or restricted under this bill. The Credit Cardholders’ Bill of Right ends the most insidious practices employed by credit card companies, protecting consumers from policies that can keep them mired in credit card debt despite their best efforts to dig themselves out.
From the Experts:
“America’s families are facing a dire economy, and this bill couldn’t come at a better time. As the consequences of the subprime meltdown spread, banks are openly increasing interest rates and fees on their credit card customers in order to cover losses in other areas. The only reason this is possible is because in the absence of almost any regulation, issuers have tilted the playing field heavily in their favor. The Credit CARD Act would level the playing field between borrower and lender by putting an end to some of the most arbitrary, abusive, and unfair credit card lending practices that trap consumers-particularly disadvantaged and minority borrowers-in an unending cycle of costly debt.” – Tamara Draut, Vice President for Policy and Programs, Demos, May 15, 2009
“Banning these abusive and unfair billing practices is an important first step in restoring efficiency, fairness, and responsibility to credit card markets and reducing systemic risk. But it is not enough for Congress to prohibit certain enumerated credit card practices. The card industry has shown itself to be remarkably resourceful in engineering its products around regulation. This means that regulatory initiatives aimed at specific practices inevitably devolve into a game of regulatory Whac-A-Mole: every time regulators put the kibosh on one practice, the card industry invents another to take its place. Congress will always be playing catch-up in this game of regulation and innovation. The only way to stop this negative innovation is to flip the regulatory model on its head. Currently card issuers are allowed to do anything, except specific prohibited practices. The better regulatory structure would be to prohibit anything, except for specific permitted practices.” – Adam Levitin, Associate Professor of Law, Georgetown University, February 12, 2009
Beyond this Bill:
The Credit Card Accountability, Responsibility, and Disclosure Act, though an important milestone in consumer protections, exhibits the signs of the credit card industry’s powerful influence. Unlike a previous version, the bill passed by the Senate does not explicitly prohibit universal default, the practice whereby a credit card company uses information unrelated to a consumer’s credit card as the basis for increasing the interest rate. Instead, card companies are left to decide for themselves when improvements in a cardholder’s credit warrant a rate reduction. The previous version, like the House version, limit the number of over-the-limit fees – fees applied when a cardholder charges more than their card limit – that card companies can apply. This version does not. Instead of outright prohibition of abusively high fees, the Credit Card Accountability, Responsibility, and Disclosure Act requires that fees be reasonable and proportional; the card industry, with easy access to political power, will determine what “reasonable and proportional” ultimately come to mean. Though the Act improves oversight of the credit card industry, the previous version required the collection of comprehensive and detailed information about an industry whose practices are at best opaque and at worst purposefully deceptive. While compromise is necessary to the legislative process, we worry that in this case compromise has been largely one-sided.
Finally, to make any credit card reform bill truly effective, legislation must ban binding mandatory arbitration clauses. Binding mandatory arbitration clauses are often tucked into credit card contracts and forfeit consumers’ constitutional right to have their disputes with the credit card company heard by a jury. Dispute decisions overwhelmingly favor credit card companies, on whose repeat business arbitrators rely. Future credit card reform should ban or limit binding mandatory arbitration clauses.
The Federal Reserve has issued rules very similar to those included in the Credit Card Accountability, Responsibility, and Disclosure Act that will take effect in June of 2010. Unfortunately, some of the provisions included in the Act are unlikely to take effect sooner, leaving consumers vulnerable during the severe economic downturn.
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