After years of having its way with American consumers, the multibillion-dollar credit card business may soon face greater oversight and tighter reins.
"I would like to put the credit card industry, issuing banks and card
associations on notice," said Sen. Chris Dodd (D-CT), chairman of the
Senate Banking Committee.
"If you currently engage in any business
practice that you would be ashamed to discuss before this Committee, I
would strongly encourage you to cease and desist that practice."
The committee recently heard testimony from experts on both sides of the credit
card reform debate, including Harvard Law professor and bankruptcy
expert Elizabeth Warren.
Warren was a staunch foe of the new
bankruptcy law, which makes it much harder for consumers to discharge
credit card debt.
"A growing number of card issuers increase their profits by loading
their credit cards with tricks and traps so that they can catch
consumers who stumble or mistake those traps for treasure and find
themselves caught in a snare from which they cannot escape," Warren
said in her testimony.
"The credit card market is broken, and
consumers pay a steep price in this non-functioning market. But it
doesn't have to be this way."
Big Fees, Big Business
Witnesses cited a number of instances in which the credit card
industry makes its profit through penalizing its customers. Chief
among them was the practice of levying fees for just about every
transaction -- even charging interest on balances already paid.
Travis Plunkett, director of the Consumer Federation of America (CFA),
pointed out that penalty fees for late payments have not only risen in
volume, but "have become primarily a revenue enhancer for credit card
issuers," he said.
Credit card companies charge fees for things such
as paying bills over the phone, which can cost the consumer an average
of $5 to $15 per transaction.
Plunkett and several other witnesses referenced a recent study
by the Government Accountability Office (GAO) that found credit card
fees had tripled in the past ten years, from an average of $13 in 1995
to $34 in 2005.
The report found a 110 percent increase in charging
"overlimit fees," when a customer carries a balance higher than their
"These monthly fees are charged every month a consumer carries a credit balance
higher than their credit limit," Plunkett said. "Critics of this practice
argue that issuers should not assess a penalty fee when they can
simply enforce the credit limit if they wish to prevent consumers from
In Plain English
Another big target was the complexity of credit card disclosure
statements. Prof. Warren noted that the average disclosure statement
grew from one page in the late 1980's to "more than 30 pages of
"Anyone who has ever tried to read a credit card agreement knows that
the terms are simply incomprehensible," Warren said. "The inserts sent
along with monthly bills to amend the card agreements are filled with
language even a lawyer would have difficulty parsing."
MSN Money columnist Liz Pulliam-Weston recently discussed the practice
of not even disclosing the card's actual interest rate until the
applicant has been approved for it.
This could lead to cardholders
playing "Russian roulette" when selecting a credit card, as they might
end up agreeing to an interest rate of 30 percent or higher without
"If you have a good credit history, you should get a good rate, not
one that's been inflated to cover the risks of others who haven't been
as responsible," she said in a recent column.
The Interchange Wars
Another hidden fee that traps consumers is one they never hear about
at all -- the "interchange fee" that retailers pay to process
transactions made with credit cards.
Merchants have been waging war with the credit and banking industries to disclose and
standardize these fees, which they say amount to a "hidden tax" on
In his opening statement, Dodd specifically targeted interchange fees
as "opaque" costs which "are passed on, in part or whole, to consumers
who have no knowledge or understanding that a fee is even a part of
the cost of bread or milk, or any other consumer product."
that interchange fees net between $30 and $40 billion for the credit
The Merchants Payments Coalition, a trade association of businesses
opposed to interchange fees, hailed Dodd's statement.
"The credit card
companies have long profited from placing hidden fees and practices on
unsuspecting merchants and consumers," they said in a statement. "The
interchange fee is the biggest fee consumers have never heard of and
accounts for more than the total of all other consumer fees such as
late fees and over-the-limit fees."
Over the Top
Most of all, the expert witnesses emphasized the willingness of banks
to lend to just about anyone as a prime reason for the explosion in
consumer credit card debt.
Travis Plunkett noted that as consumers cut
down on their total credit card balances, the industry responds with
ever-more-aggressive marketing, usually through direct mail
"CardTrak estimates that each household receives nearly 50 credit card
solicitations in the mail each year," Plunkett said. "Issuers have
increased the number of mailed credit card offerings by six-fold since
1990, from just over 1.1 billion to a record 6.06 billion in 2005. The
number of solicitations mailed by issuers in 2006 likely exceeded this
Robert Manning, Rochester Institute of Technology Professor and author
of Credit Card Nation, pointed to the expansion of lending to
lower-income households as one reason why overall credit card
profits -- and consumer debt -- is booming.
In Manning's view, the more that
lower-income families were ensnared in credit debt, the more their
debt could be used to finance larger lending moves for wealthier
"To make the assumption of debt more attractive to these households --
and to entice them into carrying debt for longer periods -- creditors
lowered minimum payment balances from around five percent of principal
to just over two percent," Manning said.
"More than one-quarter of the
lowest income families spent over 40 percent of their income on debt
repayment in 2001 ... [the] 'democratization of credit' has had
serious negative consequences for many Americans, putting them one
unexpected financial emergency away from bankruptcy."
Hope On The Horizon
The hearing put credit card issuers on notice that change may be on the way. Dodd
introduced legislation in the previous Congress that would ban certain
penalty fees and mandate clearer disclosure of credit card terms and is expected to introduce a tougher version of the bill this year.
Still, Prof. Warren warned that Congress has a limited window of
opportunity in which to act.
With the continuing slump of housing
sales causing more defaults and foreclosures, and job growth
continually shaky, consumers need help from their debt.
"Americans benefit from markets that work," Warren said. "If Congress
repairs the busted credit card market, then Americans -- consumers and
businesses alike -- will benefit as well."
Congress Targets Credit Card Companies For Reform...