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 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.

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. But for years the firms 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. Even the federal regulators finally took notice, and recently ordered banks to increase minimum payments by a modest amount.

In 2005, Congress passed punitive legislation long sought by the powerful credit card industry to make it harder and more expensive to file for bankruptcy, and to force consumers to pay off more credit card debt if they do so.

The new law includes a weak yet-to-be-implemented disclosure of how many years it will take to pay off the card if you only make the minimum requested payment. S 393, the Akaka Credit Card Minimum Payment Warning Act, would replace that industry-approved disclosure with a specific, customized warning.

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 report, "Graduating Into Debt: Credit card marketing on college campuses," for more information.

While legislation to rein in the credit card industry has been stymied by bank campaign contributions over the past decade, we are making enormous progress.  Recently, the House and Senate have held many more hearings than in past Congresses.

U.S. PIRG supports the following comprehensive reform bills and several other bills as well.

Rep. Carolyn Maloney (D-NY)’s Credit Cardholders Bill of Rights, HR 5244, which has over 80 co-sponsors:

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).

The Senator Bob Menendez (D-NJ) Credit Card Reform Act, S 2753, which includes bans universal default, includes a number of other strong provisions such as a limit on retroactive interest charges and caps on penalty fees. The bill also gives consumers under the age of 21 the right to choose whether to receive credit card solicitations. Card issuers could only solicit young consumers if they receive affirmative consent in advance.

Senator Carl Levin’s Stop Unfair Practices in Credit Cards Act, S. 1395, which is a strong bill out there. Highlights:

-- Bans universal default. If card is paid as agreed, interest cannot be raised on previous or future balances.

-- If the consumer is in default to the bank itself, the bill limits penalty rate increases to: (1) seven percentage points above the current interest rate; and (2) future credit extensions only.

-- Bans fees to pay by phone and reverses current bank practice of applying payments to lowest APR balance. (If a consumer’s balance is tied to several APRs -- often a balance transfer is at 0% APR -- but purchases and cash advances are at much higher rates, your entire payment currently only goes to the lowest balance only, if you only make a partial payment.)