New Consumer Protections Will Probably Not Remedy Everything
Consumer Outrage Prompts New Protections for Cardholders
The recent government bailout of the nation’s banks, begun under former president George W. Bush and continued under current president Barack Obama, has produced considerable outrage among many Americans, particularly those facing mounting job losses, declining home prices and income, rising variable-rate mortgages and a host of other economic and financial pressures. The $700 billion plus rescue was necessary, government and bank leaders say, to save the nation’s banking and investment system from imminent collapse and to help restore failing banks to financial liquidity and ability to offer credit to America’s businesses and consumers, both large and small.
But the disclosures of large salary bonuses conferred upon bank executives, lavish spending on entertainment and the continued tightening of credit became lightning rods for the public’s anger. When this combined with persistent complaints from consumers about credit card and banking account abuse by banks, Congress finally moved in 2009 to address at least some of the industry’s more aggressive practices.
The Credit Act of 2009 Promises Relief to Consumers
The Credit Card Accountability Responsibility and Disclosure Act, or CARD, enacted by Congress in May 2009, is being called a major step forward in reining in some of the banking industry’s excessive practices. While there are undoubtedly some specific curbs that consumers can be thankful for, there are also clear limitations to what the new law is empowered to regulate. Plus, the time gaps in implementing the various measures are allowing banks to find alternate ways to charge fees and raise interest rates, actions which have raised the ire of consumers in recent years.
What the Credit Act Will Regulate
The first phase of CARD took effect back in August 2009. Since August, card issuers must announce any interest-rate increase 45 days before it takes effect, and the notice must be in writing. Cardholders have the right to refuse the increase by closing the account and are also allowed to pay off the balance within five years under the old terms. Some banks are allowing their customers to keep an account open but no new purchases may be made on the card until the balance is paid. Another change since August requires card issuers to deliver account statements at least 21 days before the due date, up from 14 days.
A second phase takes effect in February 2010. Banks will then be prohibited from raising interest rates on current balances unless a customer is at least 60 days behind on a payment. This restriction will apply as well to the widely detested practice of raising interest rates on one balance simply because the bank learned a customer was behind on another account with a different card issuer. In addition, a customer whose rate is increased for being 60 days late must be allowed to earn back the earlier rate with successive on-time payments for six months. But these protections have several exceptions: banks can still charge increases on introductory rates, temporary hardship rates and established variable rates.
Highlights of other rules to take effect in 2010 include: for balances with different rates as a result of special transfer offers, payments above the minimum payment must be allocated to the balance carrying the highest rate; banks can only charge an over-the-limit fee for a purchase if the customer authorizes the bank to allow purchases that push him or her over their credit limit; and cardholders cannot be charged for payments made over the telephone, online or by other means unless the customer requests expedited service.
Will the Act Make a Genuine Difference?
CARD thwarts several egregious practices imposed upon consumers by many banks. What shines particularly are the limitations to how rates can be increased and the manner in which excessive payments are distributed to different balances on the same account. Of course, constricting over-the-limit fees and extending notice periods are helpful as well. But what can banks still do to generate revenue and not be overruled by CARD? As Bill Hardkopf, chief executive officer of LowCards.com, a Web site that tracks the industry, says: “There are so many things that issuers can do that the Card Act doesn’t touch.”
What issuers have been doing leading up to CARD’s full implementation is to arbitrarily raise interest rates, including on fixed-rate agreements, slash credit limits and, in some cases, close accounts, all in the name of “a challenging economy.” What they will be allowed to do after implementation is to close accounts, switch fixed-rate agreements to variable-rate ones and start charging annual fees on some cards, including new cards. For these actions, the Act offers no protection.
Where the Consumer Now Stands
Congress has acted to provide some real benefits and protections to credit-card users and it is to be praised for that. At the same time, it didn’t act on other, onerous bank practices. For instance, there is nothing in the Act that prohibits banks from charging exorbitant interest rates that have been as high as 30 percent and more, levels traditionally associated with usury. In addition, they can charge these rates retroactively after the 60-day period of being late. These actions have been taken by banks usually in response to customers missing a payment and being deemed in default of their account. Banks have shown some flexibility for one-time late customers, particularly if they have consistent payment histories. But they almost invariably impose a late charge for missing one payment. Thankfully, the Act now limits the late charge to a maximum of $39 per occurrence and at least offers the payer 60 days to mend his or her late status before major changes occur.
If and when a card user’s bank imposes severe changes on the account, the user should communicate with the bank and ask for modification of those changes. Specifically, the consumer should ask to have the credit limit raised again if drastically lowered, ask that rate increases be lowered if drastically raised and ask that a variable-rate status be returned to a fixed-rate agreement. If a large number of consumers undertook such action, the banks could be pressured if they started to see their customers leaving them for other banks offering better credit-card terms. Also, remember that being properly informed about one’s financial rights protected by law limits the opportunities to be taken advantage of. Consumers can learn more about CARD at: www.whitehouse.gov/the_press_office/Fact-Sheet-Reforms-to-Protect-American-Credit-Card-Holders .
Finally, consumers can always, and should, write or call their Congressperson asking him or her to work to expand the consumer protections in the Credit Card Accountability Responsibility and Disclosure Act of 2009.