Congress moves to regulate credit cards

For the 70 percent of US households that use credit cards, many of the nasty surprises in the fine print of credit agreements are on a path to extinction.

The Senate is on track to pass credit card reform this week, likely with a big bipartisan vote. The House passed its version of the bill late last month. President Obama says he wants a bill to sign by Memorial Day.

Even if Congress fails to act, the Federal Reserve already has passed rules of its own to ban many of the most abusive practices by July 2010. These include double-cycle billing, where consumers are billed for both their past and current statements; arbitrary increases in interest rates on existing balances; and credit-card companies’ tactic of allocating any payments in excess of the “minimum amount due” to lower interest-rate balances first.

Lawmakers are getting such an earful from voters on the woes of credit-card debt that the Congress could wind up with a stronger package of consumer protections, including a revival of state laws banning usury.

The bipartisan agreement reached by the Senate Banking Committee this week allows rate increases on delinquent accounts only after 60 days. The House version of the bill allows credit card companies to raise rates on past-due balances only after 30 days. In addition, the Senate bill would block credit-card companies from raising rates on new accounts for a year and requires a 45-day notice of any rate increase.

“This issue is finding a tipping point,” said Sen. Christopher Dodd (D) of Connecticut, the lead sponsor of the Credit Cardholders’ Bill of Rights Act, in a statement opening the floor debate Monday. After 20 years of failed efforts on credit-card reform, what’s shifting votes on Capitol Hill now is “the conditions our constituents are living with, the number of people unemployed, the obvious problem of foreclosure rates,” he added.

An e-mail to Sen. Bernard Sanders (I) of Vermont, published this week, chronicled the problems of a New Jersey woman who said her credit card company arbitrarily raised her interest rates from 7 percent to 22 percent.

“This is outrageous! I have not missed a payment and my credit rating is in the high 800's. How can they keep getting away with this?” she wrote.

She’s not alone. Some 93 percent of credit cards allow the issuer to raise the interest rate at any time, according to a survey by the Pew Charitable Trusts of more than 400 credit-card agreements by the top 12 issuers.

In another e-mail, Lori from Rockford, Mich., wrote that her credit card company raised her interest rate from 13 percent to 33 percent. “I e-mailed them and asked them why they were doing this -- that I had been an excellent customer -- and there was no reason for them to raise it. They told me not to take it personally,” she wrote.

Some 87 percent of cards allow the issuer to impose automatic penalty interest rate increases, even if the payment is not more than 30 days or more past due, according to the Pew survey. The median allowable increase was 27.99 percent per year.

“This has got to end,” said Senator Sanders, who is sponsoring an amendment to cap interest rates that credit card companies can charge consumers at 15 percent. In a separate measure, deputy majority leader Sen. Richard Durbin (D) of Illinois is proposing a cap of 36 percent.

Republicans are rallying opposition to such a measure.

“Government price-fixing hasn’t worked,” says Sen. Jon Kyl (R) of Arizona, the second ranking member of Senate Republican leadership. “What we will get is shortage of credit.”

The bipartisan agreement involved a key compromise over risk pricing, says Sen. Richard Shelby (R) of Alabama, the top Republican on the Senate Banking Committee. The original Senate draft bill would have prohibited card issuers from using risk profiles in setting rates and terms.

“The Dodd-Shelby amendment allows card issuers to price risk but requires that they consider both positive and negative changes in the consumer’s risk profile when setting rates and terms. This means that consumers will pay more when their credit risk goes up and can have their rates reduced when it goes down,” said Senator Shelby in a floor statement on Tuesday.

The Senate proposal requires credit-card companies to carry out reforms within nine months. The House bill sets a deadline of July 2010 or a year after passage of the bill, whichever comes first.

Consumer groups are urging a faster timetable for reform.

“Reforms should be put into place as quickly as possible,” says David Butler, a spokesman for the Consumers Union. “While the Fed has come out with some very good rules, we’ve heard complaints from all over the country that some companies are taking their last hits,” he says.