Obama seeks to protect credit-card users

Consumers are used to getting those credit-card letters in the mail. No, not the ones offering low rates on balance transfers, but the ones telling them in fine print that interest rates are going up to 20 or 30 percent. And if they are one minute late in paying – ka-ching! – an onerous fee will be added.

Now, the card companies themselves are looking at changes – and they’re not too happy either.

On Thursday, President Obama met with the head honchos of several credit-card companies and told them he wants them to change their ways. Mr. Obama said he wants more competition, simpler cards, non-abusive interest rates and fees, and tighter monitoring of credit card companies.

The credit-card companies replied that change is already on the way, pointing to new and stricter Federal Reserve rules that go into effect in about a year. But those rules are not as far reaching as what Obama is asking for.

“The industry laid out a case that what the Fed is doing is enough,” said White House Press Secretary Robert Gibbs after the meeting. But, he added, “The president believes that there are things that can be done and should be done beyond what the Fed has proposed to protect the consumers.”

Not only is the credit-card industry under the gun from Obama and his economic team, but Congress is also considering legislation that includes a credit-card holders’ bill of rights, which would outlaw arbitrary increases in interest rates on existing card balances.

In addition, it would eliminate “double cycle” billing by not allowing credit cards to charge interest on debt that consumers have already paid on time.

The legislation also tackles “subprime” credit cards where yearly fixed fees exceed 25 percent of the credit limit. It would prevent those fees from being charged to the card itself.

A House version of the bill will have to be reconciled with a Senate version that is being shepherded by Sen. Christopher Dodd (D) of Connecticut. The credit-card industry is opposed to some parts of both bills and is concerned that Congress might add even tougher provisions in amendments.

Consumer groups believe the president’s meeting with the credit-card companies may help get the legislation passed. It’s “a very important shot in the arm,” says Ed Mierzwinski, consumer program director at the US Public Interest Research Group in Washington. “The banks are trying to delay or kill the bill, and now that the president is behind it, that will be impossible for them to do.”

The meeting with Obama was positive, said the American Bankers Association (ABA) in a statement. “The executives listened carefully to those concerns and agreed to work with the administration to address them," said ABA president and CEO Edward Yingling in the statement.

The ABA said it pointed out to the Obama economic team that a major factor in raising interest rates has been the freezing of the securitization market for credit cards. The securitization market accounts for half of all funding for card loans.

The banking industry maintains it has to protect itself since credit-card delinquencies are rising. The number of accounts that are more than 30 days late has increased from 3.9 percent in the fourth quarter of 2006 to 5.6 percent in the fourth quarter of 2008.

However, credit-card fees are also rising. Issuers collect about $15 billion annually in penalties, or about 10 percent of total credit-card revenues.

More than three-quarters of American families have credit cards and almost half carry a balance, according to the Federal Reserve.

One of Obama’s proposals is for consumers to be able to compare credit-card offers on the Internet. According to Jeffrey Weber, CEO of Credit Card Depot, credit-card companies have been making that hard to do.

Card companies have stopped allowing websites such as Bankrate.com "to promote the cards in a comparison format,” he says. “This started happening in November, and it has made the task of finding a deal significantly more difficult.”

The banks have also made it more expensive to transfer balances. Mr. Weber says that a year ago, consumers could transfer a balance for a 3 percent fee or a maximum of $75. Now, he says, some banks are just charging the 3 percent fee without setting a cap.

“On a $5,000 balance, it used to cost $75 to transfer a balance. Now, it’s up to $150,” he points out. On June 1, Bank of America’s fee will go up to 4 percent on balance transfers. [Editor's note: The original version gave the wrong date for Bank of America's fee change.]

“Consumers trying to get out of debt have their options limited,” he says.