With US card issuers under greater scrutiny than ever before, a new study has examined the terms and conditions of a huge swathe of credit cards, finding that nearly every product had at least one feature that would fall foul of new rules being brought in. Charles Davis reports.
Even as some of the nation’s leading credit card executives trudged into the White House at the invitation of President Obama, a new study added fuel to the fire over credit card reform.
A study by the Pew Charitable Trusts found that nearly every US credit card has at least one feature the Federal Reserve and other regulators would deem “unfair and deceptive” under new rules finalised last year.
The Philadelphia-based non-profit organisation based its study on a review of the terms and conditions of 400 cards offered by 12 of the nation’s largest credit card issuers, and found widespread examples of precisely the sort of card industry practices that have raised the ire of lawmakers and consumer groups and gained the attention of the nation’s commander-in-chief.
Pew researchers examined the cards offered on 15 and 16 December 2008. According to the study, 93 percent of card agreements enabled the issuer to raise any interest rate at any time, while 87 percent of card agreements enabled the issuer to impose automatic penalty interest rate increases on all credit card balances, even if the account was not 30 days or more past due.
Stringent interest rate clauses
The median penalty interest rate on cards studied was 27.99 percent per year. Some 72 percent of cards studied included offers of low promotional rates revocable after a single late payment, and 92 percent of cards included a fee for exceeding the credit limit. Each of these practices will be forbidden once the Federal Reserve’s new credit card rules take effect on 1 July 2010, although the Democratic majority in Congress is pushing for a law making those restrictions effective immediately. The Pew study adds considerable weight to the arguments of industry reformists, as the industry seeks to slow or even halt the regulations.
The study also found that between 2007 and 2008, issuers raised interest rates on nearly one quarter of credit card accounts, costing consumers collectively more than $10 billion. As a result of its research, Pew developed its own ‘Safe Credit Card Standards’ to protect consumers that parallel key provisions of the Fed’s new rules.
Those rules include banning interest rate increases on existing debt, except when payments are at least 30 days late and requiring issuers to apply cardholders’ payments first to their highest-interest balances. But Pew recommends immediate enactment of legislation that would go further, including eliminating all over-limit and other penalty fees other than fees for payments made more than 30 days late and banning fees for making or expediting payments.
“Only Congress can help the tens of millions of Americans who are affected by [practices deemed unfair and deceptive] now,” the researchers wrote.
Congress is currently debating legislation that would provide immediate enforcement of many of the principles outlined in the standards. Representative Carolyn Maloney’s Credit Cardholders’ Bill of Rights, a bill that passed by a wide margin in the House last year before expiring without Senate action, has been reintroduced. Several bills addressing unsafe practices have also been proposed in the Senate, including the Credit Card Accountability, Responsibility and Disclosure Act, introduced by Banking, Housing and Urban Affairs Committee Chairman Senator Chris Dodd.
Politicians crank up the pressure
“With more and more Americans relying on their credit cards to pay for everyday living expenses in this economy, we need to make sure the cards they’re using are safe and fair,” said Nick Bourke, manager of Pew’s Safe Credit Cards Project. “Our research makes it clear that legislation is needed urgently to help borrowers protect their financial future. If we learned that a car company designed a car with faulty brakes, we wouldn’t let them continue to sell it and put people in danger for nearly a year and a half – we’d make them stop now. Congress needs to do the same with credit card companies – fix unsafe policies before more families are hurt.”
The White House meeting, which included representatives from Bank of America, HSBC and Capital One, among others, underscored the political gravity of an issue that the financial services industry once dominated.
After the meeting, President Obama made clear his intentions, pledging to support legislation that protects credit card borrowers from unfair rate increases and cracks down on issuers who engage in deceptive lending practices. Obama said that while credit cards are an important source of liquidity for consumers and small businesses, “the days of any time, any reason rate hikes and late fee traps have to end.”
Industry players argue their case
Credit card companies generally have taken the position that new restrictions will make credit more expensive and harder to get at a time when consumers need it most. That argument held sway for years, but in the midst of the financial meltdown, it is clear that consumer outrage over card industry practices has gained traction in Washington.
Obama said he wants to make sure that credit card companies “are able to make a reasonable profit – but they’re doing so in a way that is responsible.” Issuers who engage in illegal practices will “feel the full weight of the law”, he warned.
Hours after the card executives filed out of what surely was a most dispiriting meeting, Senator Charles Schumer, a Democrat from New York and Senator Dodd called on the Federal Reserve to impose an “emergency freeze” on issuers’ ability to raise interest rates on existing debt.
Of course, most of the issuers summoned to the White House meeting have also received government assistance as part of the federal bail-out, putting the government in an awkward position. As a shareholder, American taxpayers profit from the banks’ improved earnings. At the same time, the administration is trying to take steps that, while helpful to consumers, could cut into the institutions’ profitability.
One executive reportedly told the president that although her assignment had been to try to persuade the president not to support new restrictions, “it was pretty clear I won’t succeed.”
“You’re probably right,” the president replied. “But you should feel free to make your pitch.” The meeting then dissolved into nervous laughter, according to the issuers in the room.