The Wild West of Credit Cards Can't Be Tamed by Laws Alone

It's the beginning of the end of wild-west business practices on the part of credit card issuers. The worst credit card offense -- rate hikes on existing balances -- stops today.

That's because any notice of a rate increase to existing balances under the new credit card law must be dated no later than yesterday, 45 days before the February 22nd enactment of the bulk of the Credit CARD Act, which I introduced and which was signed by President Obama last May.

No longer will card issuers be permitted to raise rates almost at will on purchases you've already made--only on new charges going forward.

Other changes in terms and conditions similarly require 45 days' advance notice, and if you do not wish to accept those changes, you may opt to close the account and pay off the balance under the old interest rate--a fact that must clearly be stated in the 45-day notice. That 45-day period gives you nearly two billing cycles to do more than complain--to shop around for a card whose rate and terms of service you prefer.

What's more, the CARD Act also prohibits other enraging tricks that some issuers have used for years to boost their bottom line and push consumers deeper into debt, including:

  • Penalty rate increases for those less than 60 days overdue on their payments are banned.

  • Over-limit fees are allowed only if companies obtain an affirmative opt-in in advance from the customer--and must be reasonable and proportional to the cost.
  • Prohibits charging interest on debts paid on-time (Double-cycle billing).
  • Bans due-date gimmicks such as setting morning times for payment, before mail is delivered or charging fees for paying a bill by phone or internet.
  • Requires promotional rates to last at least six months.
  • But as one who writes laws, let me tell you: a law alone isn't enough. If you want to end the Wild West you need a new sheriff.

    Card companies will seize on any loophole to achieve their growth targets. On the PBS Frontline episode "The Card Game" last November, former Providian Financial Corporation CEO Shailesh Mehta said, "You make the stupid laws, and I'll comply and I'll make money."

    That's why President Obama campaigned on establishing a new Consumer Finance Protection Agency -- a new sheriff. House Financial Services Committee Chairman Barney Frank shepherded legislation that would create a CFPA through the House -- with my support and that of other House Democrats.

    This agency will be a full-time consumer protector, enforcing the rules and establishing the overarching principle: treat customers fairly and prosper; but assume more risk and treat them solely as an ATM for your bottom line and you'll suffer more than you could possibly have gained.

    The suffering has now hit everyone. In this Great Recession, joblessness has hit 25-year highs, millions of homeowners are coping with mortgages worth more than their homes, hundreds of thousands of foreclosures have occurred, and discretionary consumer spending has dropped like a rock.

    So card issuers, used to boom-time charge volume and growth, are suffering twice: reduced charge volume and increased default rates on balances from customers who perhaps should have never been offered a card's unsecured credit in the first place.

    The result for the rest of us? New rate hikes and fees imposed on the good customers that remain--all occurring during the run-up to the CARD Act's full implementation in February. (Last Fall the House passed a bill moving that implementation from February to immediately, but that measure has been untouched by the Senate.)

    What many card issuers don't seem to understand is that we are in a new era of common-sense regulation of an industry which has seen too little of common sense or regulation.

    Laws like the CARD Act are reasonable and allow markets to function as market enthusiasts imagine they should: with less friction, more transparency, and with bad actors being driven from the field. Once interest rates, terms and conditions are clearly stated upfront--even if there's an annual fee or a variable rate, as some issuers are instituting--the consumer can make a clear-headed decision about what card to choose.

    There are some companies that seem to get it. Chase and Citi have added cards and services to their lineup which are simple and easy to understand. Bank of America sent notices far in advance to their customers explaining the new rules. A full-time CFPA, if passed by the Senate, can keep financial offerings from veering into opacity and deception.

    But even with a CFPA, a third element ought to take root as well in the private sector. A new attitude and a new ethic -- enlightened self interest -- on the part of financial institutions (many of whom were salvaged by taxpayer support) must view customers as the basis for further prosperity.

    The Washington Post reports that the 00's were the first decade since the 1930s in which no net job growth was recorded. What's more, middle-income households made less in 2008, when adjusted for inflation, than they did in 1999, and 2009 won't be any better. And all this despite the growth in productivity thanks to technology!

    The constant barrage of fees, price hikes without value added, and nickel-and-dime charges, and relentless outsourcing and cutbacks in jobs have eviscerated the vast foundation on which the postwar economy was built. America's middle class is not an endless forest for card companies (or cable companies, or cell-phone companies) to clear-cut.

    A new law and a new sheriff in Washington --if the Senate will enact it -- combined with a new ethic in business will help restore Americans' faith in this new decade in the institutions that should be-- and all to often haven't been -- serving them.

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