We all know what an uphill battle reforming abusive credit card practices has been. As a twenty-five year veteran of that fight, I know it as well as anyone. But this morning, the Senate took a big step up that mountain.
Today, the Senate Banking Committee passed the Credit Card Accountability Responsibility and Disclosure Act - legislation I wrote to stop abusive and deceptive credit card practices once and for all. Indeed, 2009 may well prove a watershed moment for credit card reform.
For people like Samantha Moore, a paralegal from Guilford, Connecticut I met a few weeks ago, it couldn't come a moment too soon. In January, she was three days late on a credit card payment - the first late payment in 18 years. For that seemingly minor transgression, she had her interest rate raised from 12% to 27% and her credit limit slashed from $31,400 to $4,500 - told that the reason for the severe penalty was that she hadn't been paying enough to other creditors and that their high credit limit exceeded their income.
Samantha was a victim of "universal default" - where credit card companies use unrelated information, like a late utility bill, to increase that family's rates.
Universal default is one of countless abusive practices credit card companies regularly engage in today that my legislation would put to an end.
Here are a few other practices the Credit C.A.R.D Act ends:
"Any Time, Any Reason" interest rate hikes. Issuers often unilaterally change the terms of a credit card contract before the term is up. One issuer "voluntarily" eliminated these hikes after Congress exposed them. They even ran ads stating that "a deal is a deal." But there is nothing binding them to that commitment, and most issuers have already gone back to the practice - one a Pew Charitable Trusts survey found in 93% of 400 cards issued by the country's largest banks and issuers. This bill makes that practice illegal.
Penalty Rates With No End. Let's say you've been a customer in good standing, and you have a reasonable interest rate of 12%. You pay your bill three days late, and you get raised to a penalty interest rate of 29.9%. Once that penalty rate increase is triggered, there is no limit on how long it will last. From that point on, you continue to pay your bill on time, but despite that, you continue to pay the penalty rate for the life of that card. The amount and duration of the penalty rate is entirely determined by the card issuer. My bill says that after 6 months of on time payment, your rate has to go back down.
Double-Cycle Billing. Say a few months ago, you had a credit card debt of a thousand dollars - and that since then, you've paid off $900 of that debt. It's not uncommon for credit card companies to keep charging interest not on a hundred dollars but on the full $1,000 for another cycle or two. The Credit C.A.R.D Act prevents that practice.
Aggressive Marketing to Young People. Recently, my seven year-old daughter received a credit card solicitation in the mail. Jackie and I laughed it off, but it brings up a serious point: young people are faced with an onslaught of credit card offers. And just as we saw in the mortgage crisis with lenders and borrowers, too often, issuers offer cards to young people without verifying any ability to repay whatsoever. This is particularly true for students, who are flooded with offers the second they set foot onto a college campus - in fact, industry officials have testified to Congress that simply being a college student is considered a "positive factor" toward the ability to pay. This bill simply says that credit card companies must take into account a young person's ability to repay before allowing them to take on what is all too often a lifetime's worth of debt.
The truth is, I've been working with advocates and consumer groups to reform credit card company practices for 25 years. For much of that time, our efforts have fallen on deaf ears. But I think this time is different.
And as we learned in this housing crisis, when companies lure people into deceptive, abusive and predatory financial agreements, it not only means mountains of debt for families, bankruptcy and financial ruin for too many - it can also prove catastrophic for our economy.
That is why I have said again and again that consumer protection must be at the forefront of our efforts to modernize our financial regulatory system. There are so many things we must do to make that possible. But none will be more important than reforming the practices of our nation's credit card companies drive so many families deeper and deeper into debt. It is one issue that quite literally touches every family in the country.
The moment to act is now.