Overview

Credit card companies use a variety of unfair practices to trap consumers in a cycle of over-priced debt. The companies are allowed by law and by regulators to raise your rates for any reason, including no reason. They are allowed to operate nationally out of states, like Delaware and South Dakota, with weak consumer laws and no limits on interest rates or fees. No matter where you live, even in a state with strong laws, the weak pro-industry laws of those states govern your contract.

Consumers should either pay balances in full, or make the largest payments they can afford, and always pay early in the cycle to avoid late fees and, worse, having their rates jacked to penalty levels only a loan shark would love—36% APR or more.

For years, credit card companies were the most profitable form of banking, according to the Federal Reserve. But to ratchet up profits even more, they have recently numerous “trick, trap and gotcha” practices.

First, they started tricking consumers by advancing long-standing regular due dates all of a sudden by as much as 5 days or more to trick consumers into paying late. They put due dates on weekends and claimed that bills received after 12 noon or 1pm were late. They started imposing late fees not when bills were 30 days late, but as little as one minute or one day late. The regulators allowed this. Then, even after raising late fees to $39 or more, they claimed that being late also allowed them to jack interest rates by three times or more to 36% APR or even more.

Then, they started claiming that even if your payment history to them was perfect, they could jack your interest rate if your credit score declined (which could happen due to identity theft or numerous innocent reasons) or if you were late to some other creditor. They called this universal default.

Then, as the third strike against consumers, they invoked the extremely unfair “change the rules for any reason, including no reason” clause and started raising interest rates for no reason at all. This outraged Americans who started complaining to the Federal Reserve. Over 60,000 consumers complained. The normally somnolent agency woke up. It agreed with Maloney and Dodd that these and certain other practices were unfair. They proposed and on December 18, 2008 finalized, rules that make the practices illegal. In the past, the Fed had relied solely on disclosure to “protect” consumers. This was a major step.

But the Fed gave the banks until July 2010 to comply with the rules. So, it is important that Congress passes a law that takes effect more quickly. Further, a law will be more permanent than a rule from the regulators. And, the law will likely be stronger.

The credit card companies also spent millions on lobbying and campaign donations to get Congress to pass 2005 bankruptcy amendments that make it harder and more expensive to file for bankruptcy, so aggrieved consumers spend years paying over-priced credit card interest instead and never get a fresh start.

For years the firms also lowered minimum monthly payments and encouraged the use of cards for everyday expenses—through rewards programs—so that many consumers accumulated massive amounts of credit card debt. Until recently, a consumer who owed credit card debt of $5,000 at a common 16 percent APR, who only made the typical 2 percent minimum payment, would take 26 years to pay off the card, even if it was cut up and never used again.

Although the ability of states to regulate the fees and interest rates (APRs) of credit card companies has been severely restricted by federal preemption doctrine, which has allowed the weak laws of Delaware and South Dakota to override the state laws where credit card customers live, states are taking action in one area. In response to the growing problem of aggressive credit card marketing to young people on college campuses, some states, such as California, have restricted campus credit card marketing. Several colleges and universities have taken similar actions at the local level. See the U.S. PIRG reports, "Graduating Into Debt: Credit card marketing on college campuses," and “The Campus Credit Credit trap” and “Characteristics of Fair Campus Credit Cards” at truthaboutcredit.org for more information.
 
U.S. PIRG supports the following comprehensive reform bills and several other bills as well.

Rep. Carolyn Maloney (NY)’s Credit Cardholders Bill of Rights, HR 627, which passed the House on a 312-112 vote in 2008 (then numbered HR 5244).
 
Highlights:

• Bans imposing new penalty interest rates (of as much as 36% APR) retroactively on old balances when rate raised due to late payment to someone else or decline in credits core, not delinquency on the card itself (consumer is in good standing with card). This practice by banks is called universal default).

• Bans changing terms of card for any reason including no reason (all companies do this now

• Requires payments mailed at least a week in advance to be considered on time (no late fees can be charged).

Sen. Chris Dodd (CT)’s Credit CARD Act, S 414, which passed the Senate Banking Committee on March 31. In addition to the Maloney protections, it would:

• Ban universal default, or the practice of raising rates for reasons unrelated to your payment for the card itself, both for previous balances and for future use of the card..

• Stop unfair credit card marketing on college campuses. Students could still get cards, but would have to demonstrate an ability to repay, or have a co-signer, or demonstrate thy have taken an approved financial literacy course.