NATIONWIDE -- Last year MBNA, one of the leading credit card companies in the country, made more money than McDonalds, Wal-Mart, or Microsoft, according to the Frontline/New York Times story “The Secret History of the Credit Card.” [link to http://www.pbs.org/wgbh/pages/frontline/shows/credit/]. To most consumers, this should come as no surprise; all they have to do is look at the fees and interest charged on their credit card bills. Instead of earning a fair return on their investment, credit card companies are engaging in highly unethical practices for one express purpose: to rob the American people of as much money as they can. These abusive practices have gotten so out of control that contract attorney Elizabeth Warren of the Harvard Law School refers to the industry as “the new loan sharks in America.”
Consider some of the following abusive practices of the credit card industry
• Increasingly higher late payment and over the credit limit fees, now as high as $39. Here’s a real world example of how these fees are used unfairly. A card holder was assessed a finance charge which put her over her credit limit for the month, resulting in a $29 over-the-credit-limit fee. Since she didn’t know about it until she received her next statement, she also was charged $29 over-the-limit fee for the next month, or a total of $58!
• Not promptly crediting payments from customers, resulting in late fees, even when the payment was sent 10-14 days prior to the due date.
• Requiring payments to be credited by 10AM to noon on the due date, before the mail can be received that day.
• Increasingly higher interest rates during the time when U.S. Prime interest rates were at a 40 year low.
• “Bait and switch” promotions, giving consumers very low introductory APR rates, which are greatly increased to 30% or more if the customer makes a payment even 1 minute late.
• Raising the interest rate with no advance notice to the customer.
• Raising the interest rate to 30% or more if the customer is in default of any other bill, even if their payment with the particular credit card company is perfect (“universal default” clause).
• Imposing punitive interest rates on prior balances. This is the only industry in America where a company can change the cost of an item after the fact.
• Require very low minimum payments of 2% of the outstanding balance, with the result that the debt keeps increasing even if the card is no longer used. The result is very high debt burden that the customer can never eliminate.
• Many credit card companies contain a clause in the contract which enables them to change the interest rate at any time for any reason.
• Deceptive marketing practices, including a low introductory interest rate in large print, and the time of expiration of the low rate and the final interest rate buried in the fine print.
• Aggressive marketing to individuals with no credit, such as college students, or those with very poor credit.
• Aggressive marketing to children under 18, either through mail solicitation or through web sites such as neopets.com and their affiliated marketing companies. A staffer of Senator Christopher Dodd had a 7 year old son who received a credit card solicitation in the mail, which referred to his “excellent credit.”
The result of the above practices on the American consumer is enormous:
• 145 million Americans have at least 1 credit card
• The average credit card holder has 4.8 cards
• The total debt on these cards is $800 billion dollars
• Industry revenue from credit card fees alone was $24.4 billion dollars in 2004.
• The average credit card debt per family is $7300
• There were twice as many bankruptcies since 1990
• 40% of the credit card holders pay only the minimum payment or slightly more
• The average college student has $3100 of credit card debt; 80% of all college students have a credit card
• 11% of all teenagers have credit cards
• 6% of 13-14 year old children have one
You might well be wondering how the credit card companies have gotten away with these predatory practices for so long.
Simply put, it’s a combination of de-regulation of the credit card industry that occurred in the 1980s and a lack of sufficient oversight by the U.S. Congress and the federal regulatory agencies. The federal agencies with the power to regulate the credit card industry are the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board. Neither of these agencies has done nearly enough to protect consumers. Many of the states would like to regulate the credit card business, but have been hampered in this effort by several Supreme Court decisions.
There are currently 3 bills that have been sent to the Senate Banking, Finance, and Urban Affairs Committee. The only hope for credit card reform in the near term is the passage of these bills.
The most comprehensive reform bill is S.499, The Credit CARD Act, proposed by Senator Christopher Dodd. This bill would eliminate most of the abusive practices of the credit card industry, including the following:
• It would eliminate the over-the-credit limit fee charges if the card company approved the charge.
• It would require a 15 day prior notice for an interest rate increase.
• It would require a date by which the payment must be postmarked in order to avoid late payment fees. A statement would be required that no late fee may assessed if the payment is postmarked on or before the required postmark day.
• It would require disclosure of the number of months required to pay off the balance if only the minimum monthly payment were made and there no more additional charges.
S.393, the Credit Card Minimum Payment Warning Act, has been introduced into the Senate by Senator Akaka and others. It contains the following provisions:
• It would require a statement saying that paying the minimum monthly payment will increase the amount of interest paid and extend the time of repayment.
• It would also require the disclosure of the time required to pay off the balance if only the minimum monthly payments were made and no additional charges incurred.
• It would require that the statement also contain the total amount of principal and interest if only the minimum monthly balance were paid.
• Consumers would also have to be provided with the amount of the monthly payment required to pay off the debt in 36 months.
S.1040, or the Credit Card Minimum Payment Notification Act, is a bill that has been introduced by Diane Feinstein. This bill does not include the stringent requirements and safeguards of the two aforementioned bills.
-Information on Senator Akaka’s bill
-Information on Senator Feinstein’s bill
-Information on Senator Dodd’s bill
I am writing to urge you to support the 2 bills referred to the Banking, Housing, and Urban Affairs Committee which support meaningful reform of the credit card industry, S.499 (Dodd) and S.393 (Akaka). The interest and fees on credit cards continue to grow annually, while the prime rate has been at a 40 year low. Interest rates of 30% are common, and the average late payment fee and over-the-limit fee are $29. These fees are designed to plunder as much as they can from the consumer. The credit card companies have used unethical “bait-and-switch” methods to lure new customers, and then later change their rates either for no reason, for paying their bill even minutes late, or for defaulting on another account (“universal default).” The low minimum monthly payment of 2% guarantees that many consumers will never be able to pay off their balance. Credit card companies should be required to disclose the length of time required to pay off the balance. These policies by the industry have resulted in an average credit card debt per family of $7300 and twice as many bankruptcies since 1990.
It is time for the Congress to stand up for the consumer. Please give your support to get these bills to the Senate floor.