The Credit Cardholders’ Bill of Rights Act institutes a number of new consumer protections for people using credit cards. The bill limits the circumstances under which credit card companies can increase interest rates and requires creditors to notify consumers of an increase in their interest rate at least 45 days before the increase takes effect. The legislation prohibits applying finance charges to card balances accrued in previous billing cycles and applying fees to interest accrued during the preceding billing period if an outstanding balance has been fully repaid. The Act also regulates how credit card companies can apply payments to balances held at different interest rates and restricts card fees. The bill restricts over-the-limit fees (fees applied when a cardholder charges more than their credit limit) to three per violation and 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 Cardholders’ Bill of Rights clarifies certain terms commonly used by credit card companies and includes provisions to help consumers avoid incurring late fees even when they pay on time, such as requiring card issuers to mail a bill 21 days before it is due. Finally, the Act enhances the collection and publication of information about credit card billing practices, expands the information card companies must provide to consumers, creates standards for certain cards with very high fees, restricts the use of consumer information by creditors, and prohibits the issuance of credit cards to people less than 18 years old, except when explicitly permitted by state law.
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. At the same time, middle-class households are constantly bombarded with misleading credit card offers even when they cannot afford to take on additional debt. But 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 practices that can keep them mired in credit card debt despite their best efforts to dig themselves out.
From the Experts:
“The Credit Cardholders’ Bill of Rights…curbs some of the most arbitrary, abusive, and unfair credit card lending practices that trap consumers in a cycle of costly debt, such as sharply escalating “universal default” interest rates that can double some cardholders’ monthly payments overnight. These tricks and traps have always been unfair, but now, at a time when consumers can least afford it, these practices produce devastating financial repercussions. Moderate-income families with little flexibility in their budgets are particularly hard hit if they have to pay more in unjustifiable fees and credit card interest. Signs that credit card delinquencies and defaults are rising sharply should be a further warning that these practices have helped make credit card loans unsustainable for many Americans.” – Travis B. Plunkett, Legislative Director of the Consumer Federation of America, and Edmund Mierzwinski, Consumer Program Director of the U.S. Public Interest Research Group, March 19, 2009
“The Cardholders’ Bill of Rights won’t solve all the problems of the credit card industry…But it is an important first step to reining in an industry that has run wild in a regulatory no-man’s land of outdated and threadbare federal laws, preempted state laws, and somnolent consumer protection by federal banking regulators. The Credit Cardholders’ Bill of Rights is a major piece of federal consumer protection legislation that will help shield consumers from the worst abuses of the card industry.” – Adam Levitin, Associate Professor, Georgetown Law School, Feburary 25, 2008
Beyond this Bill:
The Credit Cardholders’ Bill of Rights Act, though an important milestone in consumer protections, exhibits the signs of the credit card industry’s influential opposition. This version of the bill prohibits 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 – only on existing balances. A stronger bill would simply ban universal default, preventing rate increases that are based on unrelated credit changes on future as well as outstanding balances.
Finally, to make any credit cardholders’ bill of rights 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 versions of the credit cardholders’ bill of rights should include provisions to ban or limit binding mandatory arbitration clauses.
The Federal Reserve has issued rules very similar to those included in the Credit Cardholders’ Bill of Rights Act that will take effect in June of 2010. Unfortunately, most 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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