Police Those Credit Cards

Via the Credit Cardholders’ Bill of Rights, the U.S. should regulate the industry to protect consumers from sudden rate increases such as those recently imposed by Bank of America, which more than doubled rates for certain cardholders. Pro or con?

Pro: Fine Print Is Useless

The recent instances of credit card companies raising interest rates without apparent reason and then offering cardholders a tiny window within which to repay at the old rate are a perfect example of why disclosure is a flawed paradigm for consumer protection.

For more than 50 years, we have assumed if consumers were made aware of their loan terms (however onerous and convoluted), they could make informed decisions. Disclosure was a way of saying: Caveat emptor.

But disclosure alone is inadequate, especially in cases where responsible cardholders unexpectedly have their rates raised significantly—going, for example, from 11% to 24% annually. We erroneously assume consumers read, understand, and act on the explanation of credit card terms they receive. Many consumers, even those who read what they receive, do not fully understand the disclosures, which are often in small print or legalese. In addition, what drives consumer decision-making is not always rational choice: Mood, emotion, and fiscal reality influence choice. That is precisely why we have federally mandated cooling-off periods for door to door sales.

We must look beyond disclosure for consumer protection. If the subprime lending crisis teaches us anything, it is that disclosure is simply not enough. We need to look to increased regulation to protect consumers, most particularly those who are vulnerable.

The recently introduced Credit Cardholders’ Bill of Rights (H.R. 5244) provides a good starting point, but we can do more. Many consumers cannot navigate the consumer financial marketplace; they cannot substitute one card for another on short notice and repay outstanding balances in one fell swoop (even over several months).

What we need is clear prohibitions that curb certain credit card lending practices, such as unjustified significant rate increases. We also need to make sure there are strong remedies for breaches—including subjecting credit card companies to monetary penalties, loan cancellation, and private causes of action (including class actions), establishing greater protection of states’ rights.

Disclosure is but one facet of an approach that must include legislation with real teeth. Only then will the term “consumer protection” have real meaning.

Con: Regulation Accomplishes Nothing Positive

The burdensome, patronizing, new credit card regulations proposed in the wildly misnamed “Credit Cardholders Bill of Rights” will hurt just about every type of U.S. consumer.

Indeed, the new restrictions that self-styled “consumer advocates” and their trial lawyer allies envision will result in immediate, sizeable interest rate and fee increases for the majority of Americans who pay their credit card bills on time. Quite simply, efforts to cap, reduce, and ban penalty fees and interest-rate hikes for bad customers will axiomatically lead profit-minded companies to seek returns elsewhere. Many will hike the annual fees and interest rates for everyone else. New ways to litigate likewise will create another lawyers’ payday while doing nothing to help ordinary Americans.

Those who live on limited incomes or fail to pay their bills on time—the supposed beneficiaries of the proposals—will also see themselves hurt. Many will be denied credit that bureaucrats decide they “can’t afford.” More will find they only qualify for the “secured credit cards”—which require a bank deposit against the credit line—that predominated in the dark days before deregulation helped banks figure out ways to extend credit to everyone.

In fact, the current credit card regulatory system serves consumers pretty well. Although hardly anybody reads through the dense fine-print agreements that come with credit cards, the mandatory easy-to-read disclosures of interest rates, penalties, and fees already give consumers a simple repository of information. The widespread availability of balance transfers—an option on nearly all non-merchant-branded consumer credit cards—helps consumers “repay outstanding balances in one fell swoop” and transfer money away from card issuers whose policies they don’t like.

Of course, the situation isn’t copacetic. Credit card agreements remain difficult to navigate, and many consumers find card issuers unfriendly. A drastic simplification of current regulations could eliminate a lot of the difficult fine print. Decreased regulation of credit card issuers, likewise, could let them find more creative ways to serve consumers’ needs. In short, we need less regulation, not more.

Opinions and conclusions expressed in the BusinessWeek.com Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

AD

Credit card companies have proved they cannot be left alone to do as they please. Loan shark interest rates are the least of my worries. Ever-changing cardholder agreements, sudden fees, poor fraud investigation, and tricking you by changing the billing dates so you miss a payment are just some of the tricks of these crooks. My still ongoing experience with Capital One (for fraud) amply demonstrates that credit card companies are very fast to send you a credit card but oh so slow to deal with problems. There should be a law that if they want to change the cardholder agreement, then they must issue a new credit card with the consumer having the choice to either accept or reject this new card without it affecting the credit rating. As soon as I redeemed my mileage points on a Chase Card, they slapped on fee after fee. So I have a mileage card with no mileage courtesy of Chase. Bank of America tried to put fees on a basic card for God's sake. Can American companies make money without resorting to trickery anymore? I guess not as the biggest crooks on Wall Street have proved with subprime mortgages. I lived in Hong Kong, and I never saw this kind shoddy business practice. They actually innovated to make money instead of fleecing consumers. I hope they burn in hell for what they have done to me.

TomV

I worked for an insurance company that did business in California a while ago. There was an earthquake, and some big companies went under because of their exposure, while a lot of homeowners never bothered to confirm that earthquake was not covered. The California legislature came to the rescue, to uphold the rights of the "little guy" and teach those "greedy" insurance companies that despite the financial risk of going bankrupt for insurance companies, they would make earthquake coverage mandatory. What happened? The insurance companies stopped issuing new policies and did not renew existing ones. Then no one had insurance, but still had mortgages that required insurance. I see the same thing here, and have to go with "Con." Yes, there is some cleanup required, but any law like this one seems to assume that companies have to issue credit cards, new law or not, like they used to. Just like California assumed insurance companies would still issue policies like they used to with the mandatory earthquake coverage. So ask yourself, do you want your credit cards as they are now, or not have any at all?

James D

It's not that difficult, folks. The laws exist, and the practices are already established to address credit consumers' rights. A credit card issuer has contracted with me to provide credit for a certain price--the APR. I engage in the contract and borrow $5,000 at 10% APR. Contract law stipulates that I repay the loan at the agreed-upon rate over the agreed-upon term. Period. The issuer originated funds at the time I took out the $5,000 at a certain rate and paid the merchants from whom I obtained the goods and services at that time. Hopefully, they have a profit margin so they can continue in business. If the issuer now finds it more advantageous to charge a higher interest rate for additional funds, over and above the original $5,000, they tell me the new rate and I decide if I want to participate or not. It's not high science. If we elect to excuse certain interests from the terms and conditions of contract law to our detriment, then we should stop the snivel and continue walking around with our hands on our ankles. When the swift kick arrives, it should not come as such a surprise. The remedy to all this should be obvious.

Diligent Dave

When Congress, some years ago, starting investigating credit card companies, First Cards (which was acquired by Bank One, which now is part of JP Morgan/Chase), lowered our rates, even sent us chocolates for Christmas. As soon, however, that the heat was on, they jacked up rates sky high.

Household Credit, once, when I made a payment by phone, messed up, and the payment wasn't made, triggering a late fee and high interest rates.

Citibank and Morgan Stanley, after they signed deals a few years ago to pay fines for their roles in the Enron scandal, immediately afterward jacked up rates sky high (Morgan Stanley did on Discover Card cards, when they still owned that institution). Pay a fine, pass it along elsewhere.

There is not a single issuer of credit cards that I trust. MBNA cards, which now is Bank of America, use to be the fairest in many ways. Their rates were in our case, among the lowest. Now that they are trying to build up their cash reserves, they are doing it with sky high rates (allowing them to collect big money on credit card interest rates, or get their principal back by pushing cardholders to pay off cards and take their debt elsewhere).

"Rape and pillage" worked better for these banking institutions when the overall economy was doing better. Now that most of it is sagging, "rape and pillage" (for Bank of America at least), and some others, is resorted to once again.

The "subprime" lending was largely intended to benefit from people they knew likely would slip in payments. Miss a payment, the whole amount comes due, and we foreclose and make money on the appreciation value of the house.

It has not been lost on me that some institutions still bear the name of the robber barons of a century or more are still on them, like JP Morgan.

These institutions today grind the face of the poor. And, if you are not yet totally poor, their policies and practices will make you that way.

Sure, regulating can have bad unintended consequences. But not regulating may have equal and possibly even greater intended consequences.

Gimme a BREAK

Jimi Hendrix asked, "Are you experienced?" I'm asking, "Are you delusional?" Congress gets so much money and so many free corporate jet rides and swanky free meals that you believe they will bite the hand that feeds them so very well? Illegal wiretaps, now DNA swabs, no meaningful regulation of cable or telephone or airlines or drug companies, none on Pig Oil (no typo), and Congress would upset their personal gravy boat, because...they're patriotic? They care about working Americans? They love children and dogs? Gimme a break. Or go have yourself committed to the psychiatric hospital for endless observation and treatment. Oh, take the voters and nonvoters with you.

John

Folks, let me make a suggestion: If you don't already belong to a credit union, join one. In most cases, they are local institutions and you're dealing with local individuals when you pick up the phone to call them. Credit union credit cards tend to have the fairest terms when it comes to APR and fees.

AD

Let me add to my previous comments. I am the first one to agree that too much regulation kills business, but the problem is that current regulation (through lobbyists) have been written to protect the credit card companies. This is what I object to. For example, if you change credit cards often because you don't want to accept their new rates or terms and conditions, then it affects your credit rating negatively. The credit card companies use this fear as leverage to change terms at will. So Mr. Rocket Science and Mr. Earthquake, your arguments don't fly. After all, even I can get the village idiot (there are many idiots in America through no fault of their own) to sign a piece of paper that gives me everything he or she has. Does that make it right? Is it ethical? Morally right? I don't think so. It's all about education and credit card companies' screwing the consumer with legalese. As for the fear that many people will not be able to get credit cards, maybe that is a good thing. For far too long people in this country have lived beyond their means like drug addicts, and the crash is coming soon. If we leave the credit card companies to their own devices, they will do what the bankers did with subprime mortgages, and the tax payers will have to bail them out, too. Is that why Visa was floated on the stock market recently? Mark my words, the losses are piling up in the card industry and it is matter of time before a mortgage-style fiasco is going to ensue. If we can outlaw loan sharks, we can outlaw bad credit card practices.

Tom

This type of legal extortion only happens in the U.S. This problem is everywhere, not just with the credit card industry. Everywhere you go, you will see fine print. Just look at how many documents you have to sign when buying a house or a car or just applying for an Internet service. Do we the general public really read and understand what they wrote in those documents?

Why do they need to have such a small font even for online forms? It doesn't make any sense.

I've never seen this type of trickery in other cultures when I was working overseas.

Matt

USAA Federal Savings Bank in Texas might offer one of the few fair credit cards around. They are only available for the military. That is fortunate because Uncle Sam doesn't take great care of veterans last time I checked.

I think regulation is generally bad, because it costs taxpayers money and creates inefficiencies. However, if like AD says, the current laws favor banks, then we need some kind of fix. I believe in consumer accountability for unwise spending, but we can't let banks unfairly take advantage of consumers.

Maybe one of the rich tycoons in the USA, like Oprah, should start Fair Bank USA. That gives me an idea--I need to squat that domain name, gotta go.

American Sharecropper

"There outta be a law!" The hallmark of tyrants for generations. The Credit card industry is as crooked as our Congress, and we have no one to blame but ourselves. Passing more national laws will do nothing to help the consumer. They never do. Our esteemed elitist representatives enact legislation with fancy titles but little in the way of substance. We have a myriad of current federal law, credit card companies have a myriad of in-house lawyers who manipulate existing laws to their advantage, and lobbyists who throw buckets of money to our crooked representatives to write law that benefits corporations at our expense. As long as we continue to vote for the existing "two party" (read two sides of the same party), we will continue to get the current level of corruption from our government. Our problem cannot and will not be solved by Congress' creating more laws. It will only be solved by a national movement to return our government to its lawful, Constitutional status.

You cannot simultaneously demand your government ignore the Constitution when it benefits you, and then expect it to work toward your liberty. You have no one to blame but yourself. This is a state issue; states used to look out for the welfare of their constituents by enacting usury laws. The federal government overrode many of those laws, and you cheered them on. You hailed the federal government when Congress passed the FCRA, ECOA, FCBA, and the EFTA--each of them with high minded goals and consumer friendly intentions, each of them used by credit card companies to extract as much money as possible from consumers by fraud and in some cases, governmental force. When Congress recently updated the bankruptcy laws (can't blame either side; it couldn't have passed without both sides cooperating), the credit card industry was instrumental in writing much of it. To the detriment of the nation, it was signed it into law with little fanfare, and you did nothing.

"Caveat Emptor" is meaningless when the fine print is so convoluted as to be unreadable. Taking its cue from the federal tax code, credit card companies have skirted full disclosure laws by making the fine print so complicated only a seasoned attorney could make sense of them. Do yourself a favor: Cut up your credit cards and learn to live without credit. I have no credit, pay no interest, and I have enough money to purchase whatever I want, whenever I want, by simply not playing the game.

Uncle Fuzzy

All banks and credit card companies purposely make the fine print so utterly confusing that you'll surely make some very simple mistake in the future that will cost you $20 or more when you accept their products, such as free checking accounts (almost all of these are not free) and credit cards and cash advances and money transfers to and from different banks. Do your best to stay away from banks and any so-called services that they may offer you. Banking reform is needed in America and also worldwide as well. But don't hold your breath until it happens, because the banking industry controls the entire world's finances. Do a Google search for the key words "Money Masters," and watch the video. You'll never be the same after watching this one. Have a marvelous day.
Blessings,
Uncle Fuzzy
P.S. Also, you may read about these money changers as far back in recorded history as you would like to go. They were doing their dirty deeds back then, too.

Wet Cranky Monkey

Uncle Fuzz makes a good point; if you don't like the terms, don't come out to play. Just as banks are not required to issue credit to anybody, we are not required to carry their loan-shark products. Vote with your pen and your pocketbook. The easiest and cheapest cure for this entire industry problem is not carrying a credit card.

I think government absolutely should regulate the industry with respect to consumer privacy protection and fraud liability. These are two areas where the consumer would have little control if the industry decided to trample us. But government has no business regulating terms, fees, maximum rate caps, credit limits, etc. That is for the free market. I personally will never carry a card that charges any kind of fee (annual or otherwise), I almost always pay in full each month, and if I do carry a balance the card must not charge more than 9.9% interest. I also refuse to carry a card if I don't earn airline miles or get some type of cash back reward. If every consumer adopted these criteria before accepting a card, how long do you think it would take banks to ante up to the terms? Not long, thanks to the free market. Problem is, most consumers are not very financially disciplined, the banks know it, and the pendulum swings in the banks' favor allowing them to push whatever terms they please.

I know there are some very shady card companies in this country that like to prey on the unwitting; HSBC and Capital One come to mind. And if BofA now falls into that category, I include them, too. The point is, none of these sheister companies would make a dime if people didn't flock to sign up for their cards with every junk mail piece that hits their mailboxes.

BJ

Let me add to the list of those to avoid: GM Master Card, which is handled by HSBC Card Services. A late payment (sent via electronic bank payment) was not posted until the day after it was due, and 10.9% went immediately to 30.9%. And they will not even consider lowering the amount. One of the people I talked to actually encouraged me to default on the amount, and to add insult to great financial injury, the calls go to Calcutta, India. That's right, folks. HSBC outsources to India, and that costs American jobs. I have been with GM since 1995--never missed a payment, not even once. So much for consumer loyalty. Will I ever buy another GM product? Oh, no. Will I encourage others to buy anything except GM products? Oh yeah. Will I do what my folks did when the banks failed and the country went into a depression? Maybe so. And while they didn't exactly cheer, they came pretty close to doing so.

AD

Thanks, BJ and Uncle Fuzzy. I nearly got a HSBC credit card, because my experience with HSBC when I lived in Hong Kong and Canada were very good. However, I can now see even HSBC is playing the crooked game here in the U.S., using laws that are favorable to banks. How come they don't do this crap in Hong Kong? Very simple: very effective laws that protect the consumer. You would have thought the laws would be the best in the U.S., but it's looking more like the wild wild West here. Shouldn't there be a law that says free means free without any terms and conditions? Maybe somebody could sue the banks for false representation. Just wish there was a chap with a few million to spare who could sue the hell out of these banks on our behalf. Hey, maybe we could do a reality show out of it? In the meantime, I am thinking of doing some youtube videos to expose these criminals, using their own advertising gimmicks. Should be fun.

P.S. My list of cards to avoid:
- Capital One (False charges and incompetent fraud investigation department).
- Chase (Charges for a free travel rewards card as soon as you redeem your mileage points).
- Bank of America (Issues you a new card with the cooperation of tellers plus loses your data and has to issue new cards with different terms).
- HSBC (false late payment fees).

SG

To their sorrow, just stick it to them.

CW

Add Providian to the list of don't-get cards. To our dismay, we were informed our rates were increased from our low rate to more than 21%, not because of default, not because of minimum payment, not by any default on anything we own. In fact, we always paid almost double on our credit card balances when we received a bill. Their excuse was high risk? Nothing more. Now if I pay a credit card, it's always more than minimum balance when due, never late on any payments. How can you call it high risk? The only high risk is getting their cards http://prod-blogs.businessweek.com/mt/mt.cgi?__mode=view&_type=comment&id=74981&blog_id=31&_return=list_comments#

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