September 22, 2008
WASHINGTON, D.C. — As the United States House of Representatives prepared for the first time ever to consider legislation that would curb predatory credit card lending practices, a broad-based coalition of organizations today urged members of the House to support the bill and send it to the Senate for action.
In a letter sent to every member of the House, 22 consumer, civil rights, community, small business and labor organizations said that the Credit Cardholders’ Bill of Rights Act (H.R. 5244) proposed by Representative Carolyn Maloney (D-NY) would “curb some of the most arbitrary, abusive, and unfair credit card lending practices that trap consumers in an un-ending cycle of costly debt.”
“By passing this bill, the House of Representatives will be taking a strong stand against the traps and tricks that many credit card companies use to increase their profits at the expense of financially vulnerable consumers,” said Travis B. Plunkett of the Consumer Federation of America. “We applaud Representative Maloney for introducing this important bill and urge all members of the House of Representatives to vote for it.”
The legislation requires credit card companies to stop:
o Applying unfair interest rate hikes retroactively to balances incurred under the old rate;
o Assessing hidden and unjustified interest charges on balances already paid off;
o Piling on the debt that consumers owe by requiring them to pay off balances with lower interest rates before those with higher rates;
o Charging late fees even though consumers mail their payments seven days in advance of the due date; and
o Charging excessive upfront fees to subprime cards targeted at consumers with blemished credit histories.
“For too long, owning a credit card company has been a license to steal,” said Ed Mierzwinski of USPIRG. “The Credit Cardholders’ Bill of Rights Act will protect consumers against the most unfair credit card practices.”
Curbing Retroactive Application of Unfair Interest Rate Hikes
Although some credit card companies have disavowed the practice of increasing interest rates for consumers in good standing based on other unrelated credit behavior, such as a drop in their credit score, many still engage in it.
“Consumers in perfectly good standing with their credit card company are understandably outraged when that company hikes their interest rate based on information unrelated to the card,” said Pamela Banks of Consumers Union. “But it’s even more outrageous to apply this type of rate increase to credit card debt already borrowed at the lower rate.”
Many companies will also sharply increase a consumer’s interest rate for making a minor mistake, such as paying late by a few days. Both practices dramatically increase the cost of purchases made when the lower rate was in effect and lead to higher minimum payments and longer payoff periods even if the consumer makes no further charges. The legislation prohibits the retroactive application of any interest rate hike based on behavior unrelated to the credit card or to actions related to the card, or for any other reason, unless the consumer is more than 30 days late.
“Credit card issuers have not learned the lessons of the mortgage crisis,” said Lauren Saunders of the National Consumer Law Center. “It is both unfair to consumers and irresponsible banking to lure people in with deceptively low rates and then, once they have incurred a large balance, explode their interest rates.”
Limiting Hidden and Unfair Interest Charges
The legislation prohibits two types of unfair and hidden interest rate charges. First, it prohibits credit card companies from using “double cycle billing” to charge interest on balances repaid during the grace period.
Second, the legislation requires issuers to apply payments more fairly to card balances with different interest rates. When consumers accept card offers or cash advances with short-term teaser rates and higher rates for other balances, credit card companies apply payments first to the lower-rate balance, allowing other balances to build up at the much higher interest rate. The practice creates a far higher effective interest rate than consumers expect. The legislation requires card issuers to apply payments first to the higher interest rate balance if a balance transfer offer is involved. In other circumstances, payments must be applied proportionately or equally to higher and lower rate balances.
Ending Unfair Late Fees for On-Time Payments
The legislation provides that consumers demonstrating payment 7 days before the due date are presumed to have paid on time and cannot be charged a late fee. It also sets a single uniform time by which payments must be received on the due date to prevent companies from setting earlier and arbitrary deadlines that result in late fees. Issuers must also mail credit card bills 25 days before the bill is due, instead of the current rule requiring only 14 days, to help ensure that consumers will have enough time to pay.
Ending Excessive Fees for Subprime Credit Cards
The legislation requires that companies that sell subprime cards targeted at consumers with blemished credit histories cannot charge upfront fees on the card that represent more than 25 percent of the total credit line that is offered.
“America’s entrepreneurs obviously are champions of the free market and it is rare that they call for increased governmental regulation, but it is equally rare that an industry be allowed to carve out such a lucrative, anti-market niche for itself,” said Kyle Kempf of the National Small Business Association. “For far too long, the credit card industry has been allowed to engage in acts in direct violation of free market capitalism and fundamental fairness. Imagine if small business owners were allowed to change their service agreements with clients ‘at any time for any reason.’ It is high time that the credit card industry be held to the same standards as all small businesses.”
“Over the past two decades since Congress last acted on credit card protections, Consumer Action has identified and documented many unfair and deceptive practices that hurt consumers who are trying to do their best to use credit wisely,” said Linda Sherry with Consumer Action. “The Credit Cardholders’ Bill of Rights Act will help restore fairness to the credit card marketplace and codify proposed consumer protections so that they are not weakened by future regulatory amendments.”
“As reflected by the increased economic distress that many working Americans are now feeling, the disclosures contained in lengthy credit card contracts are not enough to warn consumers of potential unfair and deceptive credit card practices,” said Cora Ganzglass of the National Association of Consumer Advocates. “There is a need to safeguard consumers from unjustified interest rate hikes, late fees, and change in billing practices, and H.R. 5244 is the first real step towards implementing such protections.”
“The bait-and-switch tactics credit card companies have foisted on American consumers were made possible by the same spirit of financial deregulation that brought us the subprime meltdown and the credit crunch,” said Tamara Draut of Dēmos. “The Credit Cardholders’ Bill of Rights Act is an important step in providing protections for borrowers and common sense rules for lenders.”
For a list of all of the organizations calling on the House of Representatives to pass the legislation, see: http://www.consumerfed.org/pdfs/H_R_5244%20_%20Coalition_Support_Letter.pdf
Travis Plunkett, CFA, 202-387-6121
Pam Banks, Consumers Union, 202-462-6262
Timothy K. Rusch, Dēmos, 212- 389-1407
Molly Brogan, National Small Business Association, 202-552-2904