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Although the days of surprise increases in credit card interest rates are now gone, the Illinois Bankers Association says new consumer protections will ultimately mean higher rates for everyone.
After its passage by overwhelming margins in both the House and Senate, President Barack Obama signed the Credit Cardholders' Bill of Rights Act of 2009 into law May 22.
Although U.S. Rep. Carolyn B. Maloney (D-New York) introduced the comprehensive reform legislation in early 2008 as H.R. 5244, it never reached the floor of the Senate last year. This year, however - amidst a rising swell of foreclosures, personal bankruptcies and other financial calamities, the reintroduced package - H.R. 627 - sailed through by a margin of 357-70 in the House on April 30 and 90-5 in the Senate on May 19.
Illinois Bankers Association president and chief executive officer Linda Koch says that although the new law contains many necessary provisions to protect cardholders, it forces credit card issuers to treat all cardholders the same - whether they're paying on time or not. By blurring the distinction between good payers and spotty ones, she says, it increases card companies' overall risk. To balance that increased risk, the companies will likely raise rates for all.
"The Illinois Bankers Association understands and supports the need for expanded consumer protections," Koch said. "But on the flip side, there are always unintended consequences of the law, particularly when they relate to the extension of credit. Under this new law, all the rates and terms will be uniformly imposed, regardless of whether a cardholder has a good credit history or not. People with good credit will be subsidizing those who can't pay, in the form of higher rates."
A provision requiring credit card companies to give customers 45 days' notice before any interest rate increases will take effect Aug. 22; until now, the companies were only required to provide 15 days' notice on interest rate hikes or any type of changes in borrowing terms.
Bill Hardekopf, chief executive officer of LowCards.com - a consumer resource for credit information - says the new law should prove effective by better controlling how the credit card companies do business.
"Credit card companies are stand-alone conglomerates," said Hardekopf. "They're their own companies, and they're not not-for-profit companies...so they're sure looking to make as much money as possible, but it has gotten a little out of hand. Until now, the credit card issuers have been given a tremendous amount of freedom."
The conditions on just about any credit card, according to Hardekopf, dictate that the issuers can change the rate at any time, for any reason, should market conditions warrant, and that has granted the issuer a lot of freedom.
"That's what has had President Obama so upset," Hardekopf said. "So many consumers feel like they're being taken advantage of with very, very high interest rates. Delinquency rates are skyrocketing and issuers certainly feel that. Until now, there's been a universal default policy which says that you can be perfect on paying your credit card bill but if you miss one gas bill or mortgage payment, you may get an increase in your credit card interest rate - simply because you've not kept those other bills paid. That's one of the things this reform is putting in place, in addition to restricting abrupt interest rate hikes," he added.
Chris Thetford, director of communications with the Better Business Bureau serving Eastern Missouri and Southern Illinois, agrees that the new law protects consumers by empowering them with more information than they're used to receiving from credit card companies.
"We welcome any attempt to try to make things easier for consumers to understand the agreements they're making," said Thetford. "The signing of this legislation painted some very, very broad strokes about what the changes are. Now it's up to consumers to carefully read the more detailed information they're about to get from credit card companies."
Spelling out clearly in each bill how long it will take for a cardholder to pay off the balance if that consumer is making the minimum payments, Thetford, says, is one of the required reforms. The companies must also include a section on each statement that spells out how much the consumer has paid, year to date, in interest and fees. "It's somewhat analogous to the Truth in Lending statement, wherein a borrower sees exactly how much he or she is actually paying over the long term," he said.
Another key provision of the law is that it amends the Truth in Lending Act to prevent a credit card company from increasing any annual percentage rate of interest on the cardholders' existing balance unless specified conditions are met. Unless the increase is due solely to a change in index, expiration of the promotional rate, not receiving a payment within the 30-day grace period after the due date or the consumer's failure to follow through on a work-out plan to pay off the balance, the card company can't increase the rate.
Thetford says the law requires credit card companies to include a toll-free phone number where consumers can call for credit counseling and debt management services.
The new law also requires credit card issuers to provide a 30-day advance notice if they're closing a holder's account and cancelling his card.
Under the new law, Hardekopf says, credit card companies will no longer be able to impose a fee on an outstanding credit card balance, at the end of a billing period, that is tied only to interest accrued during the preceding billing period on an outstanding balance that the cardholder already paid in full.
Maloney says the Bill of Rights also requires credit card companies to do a better, clearer job of including contact information so cardholders can call the company to resolve any issues. Under the new law, each periodic statement of account must provide the issuer's toll-free telephone number, Internet address and Web site at which a payoff balance may be requested.
"This law also grants a consumer the right to reject a new credit card after the creditor notifies a consumer reporting agency of its corresponding account," said Maloney.
Card companies are now required to mail their bills earlier, giving cardholders more time to pay their bills. The Bill of Rights requires creditors to send a periodic credit card statement of account to the consumer at least 21 calendar days before the due date for the next payment on the outstanding balance, Maloney said. "The credit card companies' information must now be disseminated in a font size that is readable," she said. "This law prescribes a minimum type size for credit card applications and disclosures."
According to Maloney, a growing share of consumers' disposable income - which largely determines consumer spending - is being diverted to service credit card debt rather than to help economic recovery. "As of March 2009, U.S. revolving consumer debt, almost entirely credit card debt, was about $950 billion," she said. "In the fourth quarter of 2008, 13.9 percent of consumer disposable income went to service this debt."
As household wealth has declined during this economic downturn, Maloney says, more American families are facing financial stress due to high debt burdens. "In 2007, before the recession began, 14.7 percent of U.S. families had debt exceeding 40 percent of their income," Maloney said. "Personal bankruptcy rates were up almost 30 percent in 2008. Penalty interest rates, which raise interest rates on credit card balances by 15 percent or more, can and is triggering bankruptcy on financially constrained families." |
