July 30, 2008
As a Congressional committee prepared to consider legislation that would curb predatory credit card lending practices, national consumer organizations called on members of the House Financial Services Committee to support the bill and to send it to the floor for passage.
The Consumer Federation of America and Consumers Union said that the Credit Card Bill of Rights Act (H.R. 5244), introduced by Representative Carolyn Maloney (D-NY), would end credit card issuers' abusive lending practices at a time when the American economy is being pummeled by the collapse of another industry based on unsavory lending: the sub-prime housing market.
The proposal requires credit card companies to stop the following practices:
• Applying unfair interest rate hikes retroactively to balances incurred under the old rate;
• Assessing hidden and unjustified interest charges on balances already paid off;
• Piling on the debt that consumers owe by requiring them to pay off balances with lower interest rates before those with higher rates;
• Charging late fees even though consumers mail their payments seven days in advance of the due date.
"The fact that a House committee will be considering this legislation shows that Congress is taking a strong stand against the traps and tricks that many credit card companies use to increase their profits at the expense of financially vulnerable consumers," said Travis B. Plunkett, of the Consumer Federation of America. "We applaud Representative Maloney for introducing this important bill and urge the members of the House Financial Services Committee to vote for it."
"Consumers in perfectly good standing with their credit card company are understandably outraged when that company hikes their interest rate based on information unrelated to the card," said Pamela Banks of Consumers Union. "But it's even more outrageous to apply this type of rate increase to credit card debt already borrowed at the lower rate."
Although some credit card companies have disavowed the practice of increasing interest rates for consumers in good standing based on other unrelated credit behavior, such as a drop in their credit score, many still engage in it.
The practice, known as "universal default", dramatically increases the cost of purchases made when the lower rate was in effect, and leads to higher minimum payments and longer payoff periods even if the consumer makes no further charges. The legislation prohibits retroactive application of any interest rate hike based on behavior unrelated to the credit card or to actions related to the card, unless the consumer is more than 30 days late.
The legislation prohibits two types of unfair and hidden interest rate charges. It prohibits credit card companies from using "double-cycle billing" to charge interest on balances repaid during the grace period.
The legislation also requires issuers to apply payments proportionately to card balances with different interest rates. When consumers accept card offers or cash advances with short-term teaser rates and higher rates for other balances, credit card companies apply payments first to the lower-rate balance, allowing other balances to build up at the much higher interest rate. The practice creates a far higher effective interest rate than consumers expect.
The legislation provides that consumers demonstrating payment 7 days before the due date are presumed to have paid on time and cannot be charged a late fee. It also sets a single uniform time by which payments must be received on the due date to prevent companies from setting earlier and arbitrary deadlines that result in late fees. Issuers also must mail credit card bills 25 days before the bill is due, instead of the current rule requiring only 14 days, to help ensure that consumers will have enough time to pay.
