A Highly Charged Relationship
Sunday, May 27, 2007
Call it a love affair with a dark side.
Consumers today can't get enough of their credit cards, slapping them down with a passion to pay for everything from fast food to plane tickets at a rate of 10,000 transactions a second worldwide.
But while Americans love the convenience of plastic, they often hate the credit card issuer. Credit card complaints outstrip all other bank-related grievances filed with federal regulators in recent years.
The avalanche of gripes generally boils down to objections about a half-dozen practices, according to congressional staff and consumer groups. The complaints mostly center on what consumers see as unfairly high interest rates and penalty fees; confusing policies that constantly change, almost always in the lender's favor; and near-insurmountable hurdles to getting help when a consumer falls into trouble or when a company makes a billing mistake.
Dave Sullivan of Sacramento said he had a credit card that ended up being bought by another company that then raised his rate for no reason to 19.99 percent from 10.99 percent.
"It irked me," he says. "You can't change the contract, but they can?" He paid it off and canceled it, switching to a Chase card, which he says he's happy with.
Regulators are listening to the complaints and preparing to issue stronger consumer protection rules. The Federal Reserve proposed new, long-awaited regulations on Wednesday that would require credit card companies to make disclosures clearer and easier to understand. But some lawmakers say they think that the Fed rules, which could become final by year's end, may not be enough and that new law might be needed.
All of the major credit card companies -- Chase, Bank of America, Citibank, Discover, Capital One, American Express and HSBC -- have engaged in at least one of these practices.
The industry defends its policies as necessary so card issuers can adjust prices to reflect the risk that card holders might default on their debt. But as policymakers step up scrutiny of the industry, companies are being forced to reexamine long-standing practices.
The president of Chase's credit card division, for example, apologized in March before a Senate subcommittee for charging a customer $7,500 on a $3,200 debt. He also promised that Chase will no longer charge additional over-limit fees after a customer is over his or her limit for more than 90 days.
At about the same time, Citigroup announced it would end two policies that consumer groups and some members of Congress have criticized as unfair and abusive.
The first is "universal default," under which a cardholder's interest rate on a credit card automatically increases if the holder is late on a payment for a credit card from another company. In a second but related practice, companies reserve the right to raise a customer's credit card interest rate at "any time for any reason."
A few other credit card issuers have backed away from universal default, but nearly all reserve the right to practice what they call "risk-based pricing," which is similar to universal default except that it doesn't happen automatically. A new survey by Consumer Action, a nonprofit group that focuses on credit cards, says many issuers have now tucked variations on universal default into "any time, any reason" clauses.
In the hope of heading off legislation banning some of these practices, the industry welcomed the Fed's proposal for better disclosure. Consumer groups and some key members of Congress, including Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), also praised the Fed action but say the industry has to voluntarily do more or face changes in the law.
A bill introduced two weeks ago by Sens. Carl M. Levin (D-Mich.) and Claire McCaskill (D-Mo.) would ban interest charges on debt paid by the due date, cap penalty interest-rate increases and prohibit interest from being charged on late fees or over-the-limit fees. The measure would also ban late fees if a card issuer delays crediting a payment, require firms to offer the option of a fixed limit a customer would not be allowed to exceed and require companies to apply payments first to charges carrying the most expensive interest rate.