By Christine Dugas, USA TODAY
The credit card industry has become a favorite punching bag for consumer groups and lawmakers, who accuse the card issuers of doing everything in their power to raise rates, charge new (and hidden) fees and punish card holders with unjust policies.
The Federal Reserve Board has taken notice. It's proposed requiring issuers to disclose clearer information about rates and fees and 45 days' (instead of 15 days') notice before they could raise rates. Congress has stepped in, too, proposing bills to restrain some of the more widely criticized policies.
The industry's stance? It says it welcomes better disclosure but opposes curbs on its ability to raise fees or rates or change policies. Consumers have yet to see any significant easing of fees and rates that have sparked outrage.
"The credit card industry has entered a quiet period since Congress set its sights on credit card practices," says Robert McKinley, CEO of CardTrak.com. "Still, late fees and over-the-limit fees have remained steady across the board."
The industry is open to the Fed's idea to make policies easier to understand. But card issuers oppose any steps that would restrict them.
"They'd prefer to improve disclosure, because words are relatively cheap," compared with lower fees, McKinley says.
Shocked by fees
Steve Gutierrez of Houston says he was recently hit by a $29 late payment after he paid online 31 minutes after a 3 p.m. deadline. Because his late payment also caused his account to exceed his credit limit, he was socked with a $29 over-the-limit fee. His 31-minutes-late payment cost him nearly $60.
"I've made mistakes, and I've overlooked the fee," Gutierrez says. "But with the over-the-limit fee, it's getting steep." As a customer since 2001, he expected his bank to waive at least one of the two fees. But it said no. He canceled the card.
Carol Khalikyar of Roswell, Ga., was irritated this year when her card's interest rate jumped from 21% to 27.5%, for no apparent reason. She called her bank, which refused to lower it. "They shouldn't be able to do things simply because they can," Khalikyar says.
In its defense, the industry contends that credit cards are fairer now than before 1990, when most issuers charged a fixed rate of about 20%. "There was less access to credit in America and higher interest rates," says Ken Clayton of the American Bankers Association. "Now, some 75% of American families have credit cards at lower interest rates. And the ability to measure risk has allowed us to target various markets that in the past may have not had access to credit."
Many consumers argue, though, that credit card disclosures are confusing and that so many penalty rates and fees can apply, it's hard to know how to avoid them.
Take David Layden, a retiree from North Tonawanda, N.Y. He's angry about being hit with $12 and $15 fees because, to avoid a late payment, he paid two card bills by phone. Those who pay online or by mailing in a check avoid such fees.
"Sometimes, my cash comes in a day or two before the due date, and I have to pay by phone," Layden says. "It sounds discriminatory. I'm not against the bank making some money, but these charges are greedy. What's Congress going to do to corral these credit card companies with these abusive fees?"
It depends on whom you ask. Rep. Keith Ellison, D-Minn., and Sen. Jon Tester, D-Mont., have introduced bills to bar the use of "universal default" by credit card issuers. With universal default, a card issuer can raise rates even if you pay on time but pay another creditor late — say, the power company.
Many banks also rely on credit reports to raise rates, according to a survey issued by advocacy group Consumer Action in May. That's unfair, Consumer Action says, because credit reports often contain errors.
States take action
Nevada has enacted a bill banning universal default. A similar bill passed by New York's legislature will soon go to the governor for his signature. The bill would bar card companies that do business in New York from enforcing universal default against New York card holders.
A broader bill, introduced by Sens. Carl Levin, D-Mich., and Claire McCaskill, D-Mo., would crack down on over-the-limit fees and bar card issuers from applying an increased rate to credit accrued before the higher rate took effect. "You have people who are hopelessly in debt," Levin says. "They fall behind, and then the interest and the penalties pile up, so there's no hope for them. We've got to find a way out." Before the bills can go to the floor, they'll need more backing from top lawmakers.
Rep. Carolyn Maloney, D-N.Y., chairwoman of the House subcommittee that oversees the card industry, has held two hearings and a roundtable discussion on Monday.
Maloney says she's concerned that improved disclosure "may not be enough to resolve some of the serious issues that consumers are confronting. And so Congress may need to step in and push the Federal Reserve to do more on this front," with its regulatory authority.
Senate Banking Committee Chair Christopher Dodd, D-Conn., is still reviewing the Senate bills. "My message to credit card companies has been clear: Abusive and unfair credit card practices must end — period," Dodd says. In January, at the first of a series of hearings, Dodd urged card issuers to review policies and end any unfair practices. But few card companies have liberalized their policies.
Citibank did say in March that it would end universal default and would no longer change the terms on an account "at any time for any reason." Instead, it will change rates only after a card expires, typically after two years. (A late payment or an over-the-limit purchase can still trigger higher rates and fees.)
Chase said this year that it would end "two-cycle billing." With two-cycle billing, an issuer calculates interest by reviewing a customer's average daily balance over two months, not just one — which causes many people to pay more than they otherwise would.
Yet, Citibank and Chase have eliminated the maximum cap on balance-transfer fees, which means they can raise those fees as much as they want.
"The costs people are concerned about, whether it's higher interest rates or fees for late payments, are within the control of the consumer," says Clayton of the bankers association. "They can avoid these fees and avoid interest rate increases. One of the challenges we have is getting across to people that this is a loan. If you pay it back, it doesn't cost you a cent."
In the end, the industry isn't likely to willingly limit its ability to raise fees or rates. "Banks may feel pretty strongly about reserving their right to change things at will," says Linda Sherry of Consumer Action. "What I'm getting from them is that they are just going to draw a line in the sand."