Credit Card Companies and Legislators: A Grand Canyon of Mutual Misunderstanding

The U.S. House voted yesterday to bring forward the provisions of the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD Act). If passed by the Senate (and few would today place a bet on the likelihood of that), the Expedited Card Reform for Consumers Act would implement regulations very soon that are currently due to take effect only in February 2010. In particular, they would greatly restrict a card issuer’s ability to increase credit card rates or vary credit card terms and conditions.

As the two sides–legislators, and lenders–face off, their sheer blank-eyed, mutual incomprehension would be almost comical were it not so potentially harmful.

Credit Card Regulation Always Bad; Government Interference Always Evil

On the one hand, credit card companies believe absolutely that they have done nothing wrong. A period of grace between the signing of the Credit CARD Act, and its implementation has been used most constructively to ensure full compliance with the new law. As a statement from the American Bankers Association put it earlier this week:

The CARD Act represents the most sweeping reform of the credit card industry in decades and banks are working diligently to implement its provisions by next February, as Congress required. But this is an enormous task, requiring the complete reworking of internal operations, risk management models, funding calculations, employee training, and computer coding, all of which are necessary for servicing hundreds of millions of accounts every day.

Accelerating the time frame for implementation of the CARD Act will be extremely difficult, if not impossible, for card issuers.

Credit Card Regulation Always Good; Credit Card Companies Always Evil

Meanwhile, some legislators say that they have been inundated with complaints from constituents who claim that they’ve been gouged by their credit card companies during the grace period between the signing of the act and its pending implementation.

Rep. Carolyn Maloney (D,NY) commented yesterday:

Card companies have redoubled many of the abusive practices that brought Congress to pass my original reforms last Spring. Rather than use the time–time they asked for–since the bill’s signing in May to prepare for the changes, they’ve raised rates and fees with absolutely no regard for the dire position of millions of their customers.

I believe the card issuers have heard the message loud and clear today: their practices can no longer be tolerated. These reforms are crucial changes which level the playing field between card issuers and card holders.

The Good, the Bad, and the Evil

As is usual in such matters, both sides are both right, and wrong. It would have been totally impossible for the industry to have complied instantly with the Credit CARD Act’s requirements, so legislators had no choice but to provide a lengthy grace period.

But it was obvious from the start that credit card companies–already shaken by what seemed at the time to be a near-complete financial meltdown–were genuinely spooked by the prospect of new regulation. The idea that they would not take advantage of the grace period to protect their shareholder’s interests, and their profitability, lies somewhere on a continuum that has naivety at one end and stupidity at the other.

Allowing an unpoliced grace period before the implementation of financial services regulations is like installing a shark tank in a children’s petting zoo. The outcome is unlikely to be pretty, but you can’t really blame the shark.

Credit Card Offers Clogging Up Mail Less

You’re probably very nearly as happy that credit card companies are sending you fewer offers as your long-suffering mail carrier is.

In the third quarter of 2009, credit card issuers sent out 391 million pieces of marketing direct mail. That averages out at about 30 million items of junk mail a week, which sounds quite a lot.

But no. In the same quarter of 2008, credit card companies sent out 1.3 billion mailshots. And that works out at a hundred million items a week.

Credit Card Deals Getting Worse…

That reduction is great news if you’re a tree that’s scheduled to be cut down to make paper pulp. But it’s not so good if you want to apply for a credit card.

The direct mail figures come from Mintel, a leading market research company.

And Andrew Davidson, who’s a senior vice president at Mintel Comperemedia, points out that there’s more to this story than just numbers. He says: “Credit card issuers are cautiously navigating Credit Card Accountability Responsibility and Disclosure (CARD) Act regulations. In addition to adjusting their direct marketing strategy by sending less mail, they’re raising rates and fees on existing and new cards. The credit card offers we see today are undeniably less attractive than they were one year or even six months ago.”

…Much Worse

Andrew Davidson’s team found that:

• Although prime rates remain static and low, variable purchase Annual Percentage Rates (APRs) in credit card mailings jumped by more than a full percentage point between the first and third quarters of this year
• This time last year, 27 percent of mailings offered fixed rate credit card deals. This last quarter, that figure was six percent.
• Introductory purchase APRs are being offered for briefer periods. Last year, half of mailings provided introductory periods of 13 months or longer. This year, just five percent did. And 21 percent gave less than six months.

Credit Still Available–If You Don’t Need It

These credit card trends don’t apply to everyone. If you’re rich, secure, and have a great credit score then you probably still receive credit card offers. In April through June of this year, Mintel says that card issuers sent out 28 percent more offers that they did in January through March. But only for premium credit cards, and only to those who presumably don’t need credit.

As Andrew Davidson says: “Credit card companies are competing to attract people with high credit scores and big spending habits. Because premium credit cards often have high associated fees and low risk, issuers see them as an excellent way to restore profitability in today’s economy.”

Credit Card Regulation Set to Die?

This week, the Hill’s latest attempt at credit card regulation passed out of the key Senate Banking Committee. The Expedited CARD Reform for Consumers Act–which would bring forward the regulation of credit card rates to December 1–may have cleared its first legislative hurdle, but its chances of passing into law are not good.

Indeed, the Wall Street Journal yesterday described its enactment as an “unlikely event.”

Credit Card Rates Ever Upward

As described in Monday’s column, legislators claim that the months between the Credit CARD Act being signed into law, and its full implementation in February 2010, were meant to be a grace period. As Senator Mark Udall (D-Colorado) put it, it was intended to allow credit card companies: “…ample time to update their computer systems and implement the new, consumer friendly policies.”

But research by the Safe Credit Cards Project at The Pew Charitable Trusts suggests that companies have instead used the time to duck new regulation by substantially increasing credit card rates while they can.

Credit Card Terms and Conditions Also Questioned

But it’s not just rising interest rates that bother the people at the Pew project. They’re also concerned by certain credit card terms and conditions that have been described by the Federal Reserve as “unfair, and deceptive.”

When he recently gave evidence to a congressional committee, Nick Bourne, who manages the Safe Credit Cards Project, revealed a number of worrying practices. In particular, he highlighted:

• “Hair-trigger” penalties that result from occasional, minor infractions
• The application of payments in a way that maximizes interest, fees, and penalty costs
• Unrestricted overlimit fees
• Disproportionate penalty rate increases that can add thousands of dollars to a cardholder’s annual costs

Credit Card Companies Doing What Comes Naturally?

Some argue that credit card companies are merely taking the opportunity to manage their risks responsibly in advance of government regulation that threatens to destabilize their traditional business models. An editorial in yesterday’s Wall Street Journal, for example, said: “If customers are being taken to the cleaners, it is because lawmakers like Mr. Dodd [Senate Banking Chairman Chris Dodd (D-CT), out of whose committee the bill just passed] sent them there.”

The WSJ editorial continued:

In the unlikely event that Mr. Dodd’s new legislation passes, banks would limit their risk in other ways, such as canceling cards or refusing to extend credit to marginal customers. The unavailability of credit can also be a burden on struggling families, not to mention having a depressive effect on the economy.

That is a good point. But others might argue that card issuers are simply making up in the only way they know for the losses that they themselves created through irresponsible lending: by gouging customers.

But whoever is correct, greater transparency and honesty in the credit card market can surely only be a good thing.

Credit Card Companies Accused

In the past few days, two U.S. senators have in effect accused credit card companies of gouging their customers. First up, last Thursday, was Senator Mark Udall (D-Colorado), and he was followed on Sunday by Senator Charles “Chuck” Ellis Schumer (D-New York).

Both spoke out in support of a new bill, the Expedited CARD Reform for Consumers Act, which was introduced by Mr. Udall, and which–if passed–would bring forward the date on which credit card regulation under the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD Act) is going to become law.

Credit Card Legislation Failing Consumers

According to Senator Udall’s statement:

The Credit CARD Act was set to take effect in February of 2010 to give the credit card industry ample time to update their computer systems and implement the new, consumer friendly policies.

Instead, credit card companies have taken the time to game the system and get rate hikes in under the wire. As a result, millions of responsible credit consumers have been victimized by unfair rate increases and dishonest practices.

Credit Card Rates Up

In their remarks, the two senators both cited work carried out by the Pew Charitable Trusts’ Safe Credit Cards Project. Between December 2008 and July 2009, the Project monitored the deals advertised by America’s 12 biggest card companies, which between them account for some 90 percent of the nation’s credit card debt.

It found that the median annual percentage rate (APR) on offer in July was between 13 and 20 percent higher than that available in December.

Credit Card Terms Tougher

But higher credit card rates isn’t the only issue facing consumers according to the Pew Project. In evidence to a congressional subcommittee earlier this month, Nick Bourne, who manages the project, said:

Since passage of the Credit CARD Act, the situation has only become worse for cardholders. Americans remained exposed to widespread practices that the Federal Reserve deemed “unfair and deceptive,” and a variety of hefty penalty charges.

The Credit CARD Act of 2009 includes many important new consumer protections that are not currently scheduled to take effect until 2010. Until then, banks may continue to raise rates on outstanding balances, impose what the Federal Reserve called “hair trigger” penalty repricing, apply payments in a way that maximizes interest costs and charge unrestricted overlimit fees.
Our latest research shows that practices labeled “unfair or deceptive” by the Federal Reserve - practices at the core of the consumer protections provided in Title I of the Credit CARD Act - remain widespread, with some policies worsening since our December 2008 study.

Unreasonable Penalties

Among the least fair practices that Nick Bourne and his team uncovered were penalties for late payments and exceeding credit limits, which appear disproportionate.

This column plans to revisit those issues soon.

Credit Card Terms Still Changing

Nobody should expect credit card terms to settle down until the Credit Card Accountability, Responsibility and Disclosure Act (CARD) comes into force, probably in February 2010. Until credit card companies are forced to do so by the new legislation, they’ll continue to protect their profitability in every way they can.

Just this month, Bank of America wrote to some of its credit card customers who pay off their balances every month, warning that in future they’ll have to pay a new annual fee of anything between $29 and $99.

Meanwhile, in a similar move, Citigroup says that it plans to charge fees to those customers who fail to spend a minimum of $2,400 a year on their cards.

Credit Card Customers Outraged

People who pay their credit card bills in full each month are used to seeing themselves as the good guys. They’re responsible. They don’t incur late fees because they always settle their monthly bill on time. They don’t get charged for exceeding their credit limits because they never do so. They never pay any interest because they never have a balance beyond the end of the interest-free period.

In other words, they never pay anything for the convenience that carrying a card brings.

But, of course, administering their credit card usage, processing transactions, printing and mailing out bills, and all the other costs associated with running a credit card company have to be paid by someone.

While Others Struggle

Trouble is, the someone who pays is usually the person who can afford it least. And they’re not always the feckless, indolent caricature of popular myth.

Demos–which describes itself as “a non-partisan public policy research and advocacy organization”–has been studying credit card debt for some years. Earlier this summer, it published its latest report, which contains some uncomfortable reading.

Those Who Pay Already

Of course, some in low- and middle-income households have made bad decisions, and are living with the consequences. But many of those who lived responsible, exemplary lives were struggling before the credit crunch began to bite.

Between 2000 and 2006, the cost of living jumped 27 percent. But during the same period average household incomes were either stagnant or actually fell. No surprise then that so many people refinanced their homes, and ran up credit card debt to bridge the shortfall.

Last year, on average, low- and middle-income households owed $9,827 in credit card debt.

Old Enough to Know Better–But Little Choice

And, surprisingly, it’s seniors who are most quickly getting themselves into trouble. On average, people aged 65 years and over owed $8,138 to credit card companies in 2005. By 2008, that had jumped by 26 percent to $10,235, by far the biggest increase of any age group.

Less surprising is the reason for senior’s credit card spending. At $3,988 per household, they have more than twice as much medical-related debt on their credit cards than anyone else.

Take Some Credit for Compassion

Of course it’s irritating when a credit card issuer asks you to pay for the privilege of carrying a card. But remember that, if you don’t, someone’s grandmother may have to do without her prescription. Or somebody else’s grandfather may have to skip a vital visit to the dentist.

Credit Cards Unpopular

Credit card companies have, over the last few months, almost gone out of their way to make consumers hate them. They’ve increased rates, slashed credit limits, introduced fees, unilaterally amended credit card terms, and switched deals from fixed-rate to variable-rate. There’s been no end to the pain they seem to have been willing to inflict on cardholders.

Small wonder, then, that consumers are reducing their credit card debt by paying down balances. And they’re avoiding those increased credit card rates by turning to alternative payment methods.

Are Debit Cards Better?

But should you follow suit? Debit cards, for example, seem to have just as many highly expensive traps for the unwary as credit cards are.

The Center for Responsible Lending (CRL) has been campaigning against high overdraft fees for some years. And it points out that 46 percent of all overdrafts are triggered by debit card rather than credit card use.

Keep on Debiting

In the old days, your bank would decline a transaction if you had insufficient funds to cover it. Now, without giving you any warning, it allows the purchase, and charges you a substantial fee. The CRL found one student who’d made seven small purchases on his debit card when he hadn’t realized he was overdrawn. The total value of all seven transactions was $16.55. The total value of the charges levied by his bank for those purchases was $245.

And, as a recent New York Times editorial pointed out: “Credit card companies, for example, were rightly criticized when some drove up interest rates to 30 percent or more. According to a 2008 study by the FDIC, overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent.”

Even a payday loan would be cheaper. But, for a more reasonable comparison, earlier this month, indexcreditcards.com reported on credit card fees. It found that the average credit card late fee is $34.35, while the average over-the-limit fee is $36.74.

Credit Card or Prepaid Card?

You’d think that prepaid credit cards (they’re really prepaid debit cards) would be a cheap option. But that’s not necessarily so.

You can pay up to $99 just to activate the card. And after that there can be fees for just about everything: monthly fees, transaction fees, ATM fees, and balance enquiry fees. One man was so shocked by how much his prepaid card was costing him that he went back to the store to complain. There he was presented with a list of more than 24 different types of fees and charges for which he had unknowingly signed up.

It’s Who You Are, Not How You Spend

The CRL did research back in 2005, well before the credit crunch. It found that more than 70 percent of the $10.3 billion charged in overdraft loan fees that year had been paid by “…chronic borrowers, living on the margins of solvency.”

If you’re a member of that group, then you almost certainly ended up paying a great deal no matter which payment method you choose. But, if you’re not–if you are good at managing money and disciplining yourself financially–then the opposite is true.

So why not just stick with the credit card you know?

Good Riddance

Bank of America, and Chase recently announced that they were deleting mandatory arbitration clauses from their credit card terms and conditions. If you’re one of their customers, you can now take any disputes you have with them to court.

Given that there’s more than a suspicion that many credit card arbitrations have in the past been biased against the consumer, this has to be good news.

But the change does have a downside, because court cases are almost always more expensive than arbitrations. But at least in court the consumer has a reasonable chance of winning.

Credit Card Trends Becoming Positive

Credit card trends have recently been toward issuers being more customer friendly. At least, a few credit card companies have begun to change their offerings in ways that benefit consumers.

But many of these welcome moves have been motivated by a need to head off increasing credit card regulation. And the change in arbitration rules appears to fall into this category.

Credit Card Arbitration: A National Disgrace?

The House Committee on Financial Services held hearings earlier this year about consumer arbitrations, and its majority report was–to say the least–unenthusiastic.

Then, in July, Minnesota Attorney General Lori Swanson announced that she had reached an agreement with the National Arbitration Forum (NAF), ‘the country’s biggest consumer arbitration company’. That agreement said: “…that the company would get out of the business of arbitrating credit card and other consumer collection disputes.”

Why the Change?

A 2007 report by Public Citizen, a consumer advocacy group, revealed the extent of the problem. It claimed that over a four-year period, 94 percent of NAF cases in California (where arbitration statistics are made public) went against the consumer. And it went on: “One arbitrator handled 68 cases in a single day - an average of one every seven minutes, assuming an eight-hour day - and ruled for the business in every case, awarding 100 percent of the money requested.”

Things became worse when it was revealed that the same private equity company has ownership stakes in both NAF, and a huge firm of debt collection attorneys. The Wall Street Journal reports that in 60 percent of credit card and other debt cases heard by NAF in 2006, that law firm represented the creditor. It also suggests that the parties went to considerable lengths to avoid this conflict of interests being made public.

Credit Card Use Unfair?

You’ve just bought groceries and paid with your credit card. The bill came to $200, but the store receives only $196, because the card companies hold back four dollars in so-called “interchange” fees. You don’t pay the four dollars. The store does. And the retailer almost certainly makes up that shortage through higher prices.

So, every single customer in the store contributes to the cost of your using your credit card. Including that desperate looking woman who was behind you in the check-out queue, and who’s now about to pay for her meager groceries using food stamps.

Not That Simple

Actually, it’s unlikely that a grocery store would pay two percent in interchange fees. Generally, credit card terms mean that food outlets pay less. But the principle is sound. And two percent is the average that American retailers pay in interchange fees on credit card use.

More Credit Card Regulation on the Horizon?

Certainly some members of congress think that the current arrangement of credit card charges for interchange fees is unfair. And, last year, a small group tried to introduce legislation that would have forced card companies to disclose the relevant rates, terms, and conditions to consumers, businesses, and the public. It would also have freed up retailers to offer discounts to those who pay cash.

That legislation didn’t make it into law. But legislators are currently looking at interchange fees again, and new credit card regulation in this area is a real possibility.

Other Side of the Argument

Of course, credit card companies see all this entirely differently. They argue that interchange fees are just another cost of doing business–like wages, rent, and utility bills–all of which are passed on to customers.

You can see their point. After all, the rich tend not to clip coupons, but all the costs of a coupon campaign (advertising, administration, the value of the discounts themselves) are shared out among all a store’s customers.

Why Pay So Much for Credit Card Use?

One question that credit card companies should answer is why American businesses (and, ultimately, American consumers) have to pay so much in interchange fees.

Rep. Peter Welch (VT-AL) was one of the congressmen who tried to regulate these charges last year. At the time, he claimed: “Credit card interchange fees in the United States are the highest in the world, accounting for as much as 2 percent of the cost of every credit card transaction. By comparison, fees in the United States are almost three times more than in Australia (0.7 percent) and four times what consumers and businesses pay in the United Kingdom (0.5 percent).”

“Stop Unfair Credit Card Fees” Petition

For the last few months, 7-Eleven, Inc.’s franchisees, and store operators have been holding a petition drive against interchange fees. And on September 24, the company announced that it was sending more than 1.6 million signatures to Washington D.C.

In its press release, 7-Eleven made some startling claims. It said that interchange fees were worth $48 billion in 2008, and “According to the National Association of Convenience Stores (NACS) 2008 State of the Industry data, on average, an American convenience store owner paid 63 percent more in transaction fees than they earned in profits.”

If those figures are correct, powerful interests will be lining up on both sides. And this should prove an interesting battle.

Good News on Credit Card Terms

Earlier this week, Bank of America (BofA) Director of Federal Government Relations wrote to Senator Chris Dodd, who’s chairman of the Senate Banking Committee. The letter said that the bank “…will not implement any change in terms (risk or economic based) re-pricing of consumer credit card accounts between now and the effective date of the CARD Act.”

In response, Senator Dodd said: “Every other credit card company should follow suit. This Congress has made it clear that abusive credit card practices are no longer acceptable.”

Not Such Good News on Credit Card Terms

Just days later, Wells Fargo & Co. unveiled its plans to hike the credit card rates it charges its customers by three percentage points.

What’s Going On? Credit Card News

All of this activity is a result of the new Credit Card Accountability, Responsibility, and Disclosure (CARD) Act. Although the bill was signed into law in May, it isn’t due to go into effect until February 2010.

The Act gives credit card issuers a nine-month window during which to do whatever they liked. So many lenders have taken full advantage of this that legislators are considering bringing the law’s implementation forward to December 1 2009.

And–although nobody’s admitting as much–some wonder whether that is why Wells Fargo chose November 30 as the date on which its new credit card rates would take effect.

The Small Print in Bank of America’s Promise

Not everything’s rosy for BofA customers. Earlier in the year, the issuer (along with Chase) changed its credit card terms, switching most of its customers from fixed to variable interest rates.

So the bank’s promise to Senator Dodd doesn’t prevent it from adjusting variable-rate cards in line with changes in the Prime Rate. And, interestingly, when BofA says “prime rate,” it isn’t talking about the Fed’s.

According to its website, “The Prime Rate is set by Bank of America based on various factors, including the Bank’s costs and desired return, general economic conditions and other factors….”

Since December of 2008, BofA’s prime rate has been 3.25 percent.

But the Big Print’s Still Welcome

None of this detracts much from what is essentially good news for BofA customers. Indeed, it appears to be part of a concerted effort on the part of the bank to transform itself into a more customer-friendly institution. Certainly, this week’s move on credit card rates followed an announcement just last month of welcome plans to help BofA banking customers avoid excessive overdraft charges.

Will Others Follow?

The credit crunch and the subsequent recession genuinely frightened many senior people in the credit card industry. And the CARD Act scared them nearly as much. Many feared that the industry would become substantially less profitable.

And much of the recent hiking of rates, slashing of limits, introduction of annual fees, and general messing with credit card terms stemmed from this fear.

But, also this week, Forbes reported that some industry analysts are predicting a return to normal business conditions for the credit card industry during 2011.

As this sinks in, perhaps more issuers will follow BofA’s lead.

Students Wave Goodbye to Credit Cards

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 is going to introduce new protections for students when it goes into effect in February 2010. These include:

• A ban on issuing cards to those under 21 years old, unless they have either a co-signer or proof that they can make repayments
• A ban on the gifts and incentives (free food, T-shirts, Frisbees, and so on) that card issuers “give” to students who fill in credit card applications
• A ban on the marketing of cards on all campuses that are frequented by those under 21

How Bad is Student Credit Card Debt?

In April of 2009, Sallie Mae, which describes itself as “the nation’s leading provider of saving, planning, and paying for education programs,” published the results of a study it conducted in the spring of 2008.

Among the findings were:

• The large majority of undergraduates (84 percent) had at least one credit card, and half of college students had four or more
• At $3,173, the mean balance was the highest since the study began in 1998
• Only 15 percent of new students had a zero balance on their credit card, compared with 69 percent in 2004
• More than 80 percent did not pay off their balance in full each month, and consequently incurred interest charges
• Forty percent of respondents admitted to charging items to their cards, even though they knew that they lacked the funds to pay the bill
• The average credit card debt of a senior on graduation was more than $4,100, up from $2,900 in 2004

A Worrisome Picture

All of this adds up to a disturbing picture of high credit card debt, and irresponsible card usage among the people who will be running this nation in the future. And you can see why legislators want to remove the temptations posed by cards.

But there is another side to this coin.

Punishing the Innocent Along with the Guilty

Perhaps the most obvious argument against greater regulation is that it punishes the innocent–those students who use their cards responsibly–along with the guilty. Of course you can say that effectively banning many students from holding credit cards protects those in the minority who use them inappropriately.

But if that’s the case, why not ban all credit cards? That would protect those in the minority of adults in the general population who use them inappropriately. What’s the difference?

Real Hardship

Of course, credit card debt can cause real hardship. But denying access to credit can have just as damaging effects.

The Sallie Mae study found that 92 percent of respondents put textbooks and other educational necessities on their credit cards. And 30 percent charged tuition. What happens to those students when access to this line of credit is denied them?

And, what happens to the 84 percent who charge food and the 70 percent who charge clothing?

Will some of them go hungry? Will some have to quit education altogether? Will some be driven to take out even more expensive, sub-prime personal loans from unscrupulous lenders? These are all questions that need to be asked to determine whether CARD is really a good deal.