Debt-strapped consumers vent their frustration with banks as they root for new rules to rein in card rates and fees
David Giantomasi says he vigilantly paid his credit-card bills each month. Even if he could only make the minimum payment, he made sure to get all his monthly payments squared away. So he was shocked when the interest rate on his Chase credit card suddenly jumped to 19.99% from 7.99%. When Giantomasi called the card issuer to demand an explanation, he was enraged. He was told that overall turmoil in the credit markets meant higher rates for a number of customers.
Chase won't comment on individual cardholder accounts. "I felt completely helpless," Giantomasi recalls. "These credit-card companies are beyond the law and should be more tightly regulated."
Giantomasi isn't alone in his desire to see the credit-card industry reined in. Lured by bank come-ons that sold a debt-fueled lifestyle of lavish vacations, sumptuous restaurant meals, and carefree shopping sprees, consumers piled up unprecedented debt during the credit boom: Consumer credit-card debt has skyrocketed to almost $1 trillion, double what it was in 1996. Unpaid credit-card debt is on the rise, too, up 22% in June from a year earlier, according to reports by the major credit-card issuers, American Express (AXP), Bank of America (BAC), Capital One Financial (COF), JPMorgan Chase (JPM), Citigroup (C), and Discover (DFS). But when the housing bubble popped and the economy slammed on its brakes, suddenly many free-spending consumers were left holding the bag.
Now those same cardholders are rushing in to support rule changes proposed by the Federal Reserve Board back in May, to limit unfair or deceptive credit-card practices.
New Rules on Rates
The proposed rules, which could be implemented as early as yearend, would represent the first time in over 20 years that a government agency has recommended banning certain credit-card industry practices. Regulation has been left largely to the card issuers, and the Fed and other banking regulators tended to stick to forcing card companies to disclose terms and conditions clearly to customers.
Under the proposed rules, though, banks would no longer be able to hike up interest rates on existing debt, as Giantomasi experienced. Card companies would have to split required monthly payments evenly between the high- and low-rate balances on a card. (Currently, card companies allocate payments to the lowest interest-rate balance first, which leaves a lot of cardholders unable to make a dent in balances at higher interest rates. That's a recipe for rapidly accruing interest and a feeling of helplessness about managing debt, say cardholders.) And consumers would get a longer grace period before they're slammed with penalty fees.
Many consumers say it's about time. The rules were proposed just as the U.S. economy started to tank, when many card holders were falling further behind on their payments at the same time home equity lines of credit were drying up and jobs were disappearing. Regulatory agencies came under fire to act, and Senator Carl Levin (D-Mich.) held hearings this spring to examine card company billing practices.
The proposed regulations generated more than 56,000 comments from individuals, banks, credit unions, and industry associations. That's a record number of submissions, says the Fed, beating the previous record of 45,000 submissions for a proposal that would have let financial firms assume the role of real estate brokers.
"Something needs to be changed to keep credit-card companies from taking advantage of people," consumer Paul Wolcott posted to the Fed comment board. Another cardholder, Cleve Prince, wrote that his credit-card debt drove him to the brink: "Credit-card companies had increased my interest rates on each one of my cards so that my only recourse was to file for bankruptcy."
Consumer advocacy organizations encouraged their members to use the public comment period as a forum to air their grievances and push for change. Consumers Union, a nonprofit consumer-rights organization, encouraged its members to write in. The group set a goal of generating 10,000 comments. "Look how many people agree," says Mark Hickney, a small business owner from Dallas.
Of course, not everyone agrees. The five largest credit-card issuing banks say that as much as consumer may enjoy lashing out, they're likely to regret the end result of the rule changes. The new regulations will curtail their ability to "price for risk," the banks say: By being able to change the rates they charge cardholders based on payment history, outstanding debt, and credit score, banks can price in the risk that each individual consumer won't be able to pay off his debt. The alternative is to cut back on low-interest offers for all cardholders, the banks say.
Banks Call Rules Misguided
"We have very real concerns that the proposal will result in higher costs for cardholders across the board," says Peter Garuccio, a spokesman for the American Bankers Assn. (ABA). If the Fed rules rob them of the right to price for risk, all consumers will suffer with higher rates overall and worse teaser rates.
In a response posted to the Fed's Web site, Bank of America, the nation's largest credit-card issuing company, summarized the industry's attitude toward the new rules: "We believe the practices the agencies are mandating are far from ideal, from the perspective of consumers, banks, and the financial system as a whole." Bank representatives held a series of private meetings with the Fed and the ABA. According to notes from the meeting on the Fed site, industry officials reiterated that risk-based pricing actually keeps rates down overall for the majority of consumers.
Consumer groups counter that the rule changes are fairly minor compared with the reforms they would like to see.
Once the 75-day comment period ends, the Fed will decide what rules to approve. Sandra F. Braunstein, who heads the Fed's consumer and community affairs division, told congressional lawmakers in April that she thought the proposal would be hammered out and finalized by the end of the year.
Business Exchange related topics:
Credit Card Industry