After the economic meltdown of 2008, the government has stepped in to try to regulate and oversee the business tactics of banks, mortgage companies, credit card companies, and debt collectors. This massive overtaking by the government resulted in the passing of the “Dodd-Frank Wall Street Reform Act,” which then spawned the Consumer Financial Protection Bureau in July of 2011. The CFPB was formed to regulate consumer protection with regard to financial products and services offered in the United States.
Prior to these regulations, card companies were “loading their credit cards with tricks and traps so they can maximize income from interest rates and fees,” according to Elizabeth Warren, a Harvard University law professor who was responsible for the formation of the CFPB.
The Federal Reserve Board has taken notice and requires issuers to disclose clearer information about rates and fees and 45 days (as opposed to 15 days) notice before they can lawfully raise rates. Congress has also held hearings to investigate credit card business practices, and many large credit card companies, such as American Express, have been fined for illegal tactics. American Express agreed to pay $85 million in refunds to 250,000 cardholders because of unscrupulous marketing incentives.
Examples of Questionable Practices
In general, most consumers will argue that credit card disclosures are so confusing and so many penalty rates and fees may apply, it’s extremely difficult to know how to avoid them. There are so many different credit cards to choose from, but only a bare minimum of the terms are likely to be reviewed by the average consumer. And, most disclosure forms are typically written in a language only a lawyer can interpret. But there are some questionable practices that you should be aware of, and by law these must be disclosed/defined in your credit card agreement, so read your terms and conditions carefully.
Some Examples:
- Universal Default. A common but often criticized practice, this is when a credit card company raises a customer’s interest rate because he or she made a late payment on another, usually unrelated bill. These card issuers may monitor credit reports for notices of late payments, and at any sign of delinquency they boost cardholder rates to the highest penalty rates. Issuers may also raise your rate if your overall debt has increased. Nearly 45 percent of banks used universal default in 2005, according to the Consumer Action advocacy group. Compounding matters, many card issuers who practice universal default also charge rates based on the “first in, last out” method, meaning cardholders must pay their outstanding balances in full before card issuers will drop rates back to normal levels.
- Double-cycle, Two-cycle or Double Billing. With double-cycle billing, a card issuer calculates interest by reviewing a customer’s average daily balance over two months, not just one – which causes many people to pay more than they otherwise would. For example, say you have a $500 balance, and you pay $400 by the by the due date. During the next billing cycle, your interest would be based on the entire $500 rather than the $100 you owe. According to the Government Accountability Office, it usually results in finance charges at least 50 percent higher than those calculated using a single month’s balance. The two-cycle billing practice generally doesn’t affect people who pay their balances off religiously each month, or borrowers that maintain a revolving balance; but can burn those who occasionally carry over a balance to bridge a gap, for instance.
- Credit Line Decreases. Credit-card companies are required to notify you by mail if they change your credit-card terms, including reducing your credit limit, but there is no guarantee that you will receive and read that notification in time. Creditors are most likely to reduce your limit if they notice activities that suggest you may be in debt trouble, such as high credit charges, late payments, or applying for too much credit. In general, anything that could result in a credit-score decrease may also put you at risk for facing a credit-limit decrease.
How to Control Credit Card Costs and Questionable Billing Practices
You need to complain! If you’ve been hit with a high fee because your payment was a day late, call and ask for it to be waived. If you are a customer with a good payment history there is a good chance they will agree to disregard the fee.
Be sure to review your card terms and conditions thoroughly; if they contain many of the questionable features, switch to a more consumer friendly card. If you need to submit a complaint to the CFPB, here is more information on how to go about it.
Support legislation proposed by Congress or your State which would restrain some of these questionable policies and restrict/cap fees and rates charged by card-issuers. The recently passes Credit CARD (Card Accountability, Responsibility and Disclosure) Act provides the following protection to consumers:
- No Interest on Debt Paid on Time. Prohibit interest charges on any portion of a credit card debt which the card holder paid on time during a grace period.
- No Trailing Interest. Prohibit added interest charges on credit card debt which the card holder paid on time and in full.
- Limits on Penalty Interest. Prohibit interest rate hikes on a credit card account unless the card holder agrees to them at the time, and, in any event, limit penalty interest rate hikes to no more than a 7 percent increase.
- Apply Interest Rate Increases Only to Future Debt. Require increased interest rates to apply only to future credit card debt, and not to debt incurred prior to the increase.
- No Interest on Fees. Prohibit the charging of interest on credit card transaction fees, such as late fees and over-the-limit fees.
- Restrictions on Over-Limit Fees. Prohibit the charging of repeated over-limit fees for a single instance of exceeding a credit card limit, and allow such fees to be charged only when a card holder’s action, rather than a penalty, causes the limit to be exceeded.
- Fixed Credit Limits. Require that card issuers must offer consumers the option of operating under a fixed credit limit that cannot be exceeded.
- No Pay-to-Pay Fees. Prohibit charging a fee to allow a credit card holder to make a payment on a credit card debt, whether payment is by mail, telephone, electronic transfer, or otherwise.
- Reasonable Currency Exchange Fees. Require currency exchange fees to reasonably reflect the credit card issuer’s actual costs.
- Prompt and Fair Crediting of Card Holder Payments. Require payments to be applied first to the credit card balance with the highest rate of interest, and to minimize finance charges. Prohibit late fees if the card issuer’s actions caused the delay in crediting the payments.
- Prime Rate Reference. Require interest rates linked to a “prime rate” to use the prime rate published by the Federal Reserve Board.
- Annual Audit. Require the credit card issuer’s primary regulator to perform annual audits to ensure compliance with credit card requirements and prohibitions.
- Improved Data Collection. Improve existing data collection efforts related to credit card interest rates, fees, and profits.
- Transition Period. Allow credit card issuers six months to implement the bill’s provisions.
Did Credit Card Companies Respond to the Complaints?
The Industry’s stance seems to be that it would welcome better disclosure, but it opposes curbs on it’s ability to raise fees or rates or change policies.
Several major credit-card companies announced some policy changes. Citi Card said it would no longer raise interest rates for customers who pay their bills on time, but make a late payment to another creditor (i.e. eliminating universal default). They also announced that they would not increase interest rates or fees on a customers credit card until the card expires and a new card is issued – unless the customer pays late, exceeds his credit limit, or pays with a bad check. If the card’s interest rate is linked to the prime rate, it will change only when this moves.
Chase Bank also announced it is dropping it’s two-cycle billing practices, along with easing up on some of the fees it charges customers who exceed their credit limits.
