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Obama should prioritize credit card reform

The burden of paying off debt increases when credit card issuers raise interest rates or impose high fees.

March 19, 2009

President Barack Obama
President of the United States of America
1600 Pennsylvania Ave NW
Washington, DC 20500

Dear President Obama,

Most economists agree that Americans need to start spending again in order to help stimulate the economy. But the credit card companies are making that hard to do. When stimulus payments increase our paychecks on April 1st, millions of Americans will have to give their stimulus money directly to their banks to pay recently increased credit card interest rates and fees. Consumers Union, the non profit publishers of Consumer Reports, Consumer Federation of America and U.S. PIRG write to respectfully ask your help and support for credit card reform now, not in July 2010, when new reforms mandated by regulation are scheduled to finally go into effect.

An estimated 173 million Americans hold 1.5 billion credit cards in this country. Of that, consumers owe over $850 billion in credit card debt, the burden of paying for this debt increases when credit card issuers raise interest rates or impose high fees. When a credit card issuer dramatically raises the interest rate on money already borrowed, families face higher minimum payments and a loss of disposable income at the worst possible time.

These credit card practices harm families. Increasing interest rates on existing balances after the money is borrowed, moving around due dates, and abruptly reducing credit limits can damage consumers’ credit scores. In December, the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration published final rules restricting retroactive interest rate increases for money already borrowed, giving a reasonable time to pay before late fees can begin, and more. But the rules do not go into effect until July 2010, giving banks plenty of time to circumvent the intent and spirit of the rules with these abusive practices during the interim. That is exactly what they have been doing.

Hundreds of thousands of Chase customers were hit with a 4% interest rate hike or a $120 annual fee and a doubled minimum payment. Capital One just announced rate increases for most of its 37 million customers averaging 5%, although many actual customers reported higher increases. In December, Discover reported that it had closed 3 million accounts and plans to cull 2 million more. Bank of America Corp., Wells Fargo & Co. and American Express Co. are among other major lenders that have notified customers recently of rate increases.

According to a January 2009 survey by the Federal Reserve, 45 percent of U.S banks reduced credit limits for new and existing card customers at the end of 2008, a continuing trend from the previous quarter, and some experts estimate there may be $2 trillion more in cuts still to come. While reducing credit availability can be a responsible way for credit card issuers to manage growing financial risk during difficult economic times, the aggressive credit line reduction policies that some credit card issuers are imposing with no notice to consumers are harmful and unfair. They put consumers at greater risk of being charged higher interest rates, of falling deeper in debt, and of causing a ripple effect among issuers.

By April 1st, most Americans will see more money in their paychecks from reduced tax withholding, designed to loosen spending again. But that extra money – about $44 per month per taxpayer – won’t stimulate spending if families must pay more in interest rates on their credit cards. For families carrying the average balance of $7,300, a 4% rate increase (the amount announced by Chase last month for certain cardholders) eats up one-third, or $24, of their stimulus payment. For those who owe more than the average debt, even more will go directly to the banks to pay for arbitrary fees and rate hikes.

These companies are getting tens of billions in taxpayer bailout money. Yet, even as they accept TARP funds, they are hurting our chances for economic recovery.

In recent testimony before the Senate Committee on Banking, Housing and Urban Affairs, Prof. Lawrence M. Ausubel, Professor of Economics, University of Maryland, pointed out that retroactive interest rate increases by lenders are short-sighted:

“Why do credit card issuers unilaterally adjust interest rates upward, when lenders as a group might benefit from downward adjustment? This occurs because credit-card lenders face a common-pool problem, a prisoner’s dilemma problem. While lower interest rates by the group of lenders would reduce the likelihood of bankruptcy and increase eventual collections, each lender individually has the incentive to grab as much money as possible prior to bankruptcy.”

In short, instead of helping Americans get back on their feet, ensuring the stability of long term debt repayment, and kick starting the economy, it appears that credit card lenders are each trying to maximize short-term income from credit card interest payments even if the consequences are harmful to their own customers.

Financial writer James Surowiecki of The New Yorker this week summed up the larger effects of sharp interest rate increases and abrupt cuts in credit lines: “These tactics are not going to improve the credit-card industry’s dismal reputation. They’re also not going to help an economy in recession, since reduced credit lines take away an important cushion for consumer spending, and higher interest rates and increased fees are likely to drive more people to default. …Smaller credit lines and less borrowing make sense. But in the short run they’re going to throw a lot of sand into the economy’s gears.”

Here’s what hard-working, responsible consumers said to Consumers Union about how they are being treated by their credit card company:

• Susan in Medford, OR wrote: “Although we always pay on time and do not carry a balance (pay in full) Capital One sent notice they were increasing our APR from 6.91% to “a variable rate equal to 15.9%” on our business credit card. We are also getting the same treatment with our personal credit cards which we also pay on time & in full when used.”

• Michael in Carmel Valley, CA wrote: “Capital One just doubled the interest rates on our family credit cards. We pay on the accounts twice a month at least, and maintain zero balances when we can. We have not been late in years. These kinds of rates are insulting, usurious, and can only be a result of greed and opportunism on the part of the credit card companies.”

• Harry, a Consumers Union blog commenter on the growing irrationality behind the bank’s recent moves: “I was hit with a 35% penalty rate when one payment was one day late. Fortunately, I was able to move the balance to a home equity credit line. But the same bank that hit me with the penalty is now (yes, even NOW!) flooding me with come-on offers. With banks becoming more and more irrational about lending, it’s important to put consumer protections in place as soon as practicable.”

• Michael, a Consumers Union blog commenter on the inherent unfairness in the current bank activities: “Why should creditors lower or cancel accounts thus effecting credit scores when you have none nothing wrong. For all those creditors that have children in school maybe we should change the grading criteria midway through, and one late paper or the idea that they may be late give them a D or F or just change the requirements because it said so in very small print on their syllabus.”

• Here’s how Paula in Helena, Alabama put it in a recent comment she posted to ConsumerAffairs.com: “Since 2005, Chase aggressively pursued me both with telemarketing and mail for lower interest rate offers of 3.99 – 4.99% for purchases and balance transfers. Since January of 2009, they have doubled my minimum payments and charged an additional $10.00 fee to my account. I was never told in the initial agreement that they would ultimately do this. I have always made my payments on time. I have a high credit rating and pay my other bills on time as well. I called them about it and the response was that they would only take away the $10.00 fee and lower my monthly minimum payment back to where it was if I agreed to go with a higher interest rate. I refused to do so. I am upset that we who are American tax payers are bailing them out with 25 billion and they are treating us this way. This is very wrong. We need the government to intervene and protect us from such fraudulent practices.”

Credit card reform is not just a need, it is an urgent necessity. We respectfully ask for your help in stopping the most egregious and arbitrary credit card practices now, instead of waiting until July 2010.

We also urge you to ask Congress to send you a strong credit card reform bill as soon as possible. That bill should immediately outlaw the practices defined by the Federal Reserve Board as unfair or deceptive, and should include restrictions on the size of credit card fees and on the size and duration of penalty interest rates. These reforms will help families and help the economy.


Pam Banks
Policy Counsel for Financial Services
Consumers Union of the U.S.
1101 17th Street NW, Suite 500
Washington, DC 20036

Travis B. Plunkett
Legislative Director
Consumer Federation of America
1620 I Street, NW, Suite 200
Washington, DC 20006

Ed Mierzwinski
Senior Fellow
U.S. Public Interest Research Group
218 D Street SE
Washington, DC 20003-1900