By Nancy Trejos
Washington Post Staff Writer
Sunday, May 17, 2009
Congress is on the verge of passing legislation that would transform the way credit card companies and consumers interact.
It's been a long time coming, consumer advocates say. But relief won't come anytime soon, even if the legislation makes it to President Obama's desk by Memorial Day, as he has requested.
As proposed, the earliest that either the House or Senate version would go into effect is nine months after being signed into law. The Federal Reserve, meanwhile, has approved new regulations that do not go into effect until July 2010.
"Both the politicians and the regulators are riding in like the cavalry, and the settlers are already dead," said David Robertson, publisher of the Nilson Report, a newsletter that monitors the credit card industry.
Credit card debt has jumped by 25 percent in the past 10 years, reaching $963 billion in January 2009, according to the Federal Reserve. Delinquency rates have increased by more than a third since the end of 2006, with 5.6 percent of accounts at least 30 days late in the fourth quarter of 2008, according to statistics cited by the White House.
Exacerbating the situation is that card companies, hurting from lost revenue, have in recent months taken punitive measures such as raising interest rates and cutting credit lines for both delinquent customers and those who have paid on time.
In a survey conducted by consumer education site Credit.com in February, 33.7 percent of 1,004 borrowers said their credit card company had increased their rate or minimum payment due, changed their due dates, lowered their credit limit, scaled back their rewards program or closed their account. Industry experts said they expect such actions to continue.
"With implementation nine to 12 months away, I think the reign of terror we've seen going on relative to consumers will continue," said Adam Levin, former New Jersey consumer affairs director and founder of Credit.com.
Other analysts believe that card issuers will refrain from taking negative action so it doesn't appear that they are gouging customers.
"The change in the law itself will not directly help [consumers] right now, but I do think the environment has changed so much that there will be companies that will do the right thing," said Nick Bourke, manager of the Safe Credit Cards Project for the Pew Charitable Trusts.
White House officials, who have stepped up efforts to reform the industry, are optimistic that the industry will change rapidly.
"I think that consumers will fairly quickly see competition between credit card companies that we haven't seen before," said Jared Bernstein, Vice President Biden's chief economist. "Instead of competition based on opaque and sometimes deceptive practices, it will be competition based on who's more transparent, who's offering a clear set of terms that consumers can understand."
That competition, he said, would ultimately lead to lower interest rates.
Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, an industry group, said most interest rate changes are a result of actions by consumers. "A small number of Americans have seen an increase in their interest rate due to the increase in riskiness in the economy," he said.
Any changes in terms over the next months, he said, will not be based on the credit card legislation. "Increases in interest rates and fees aren't premeditated," he said. "They are the result of market forces and contract terms."
Sean and Mary Craig worry that the new rules will do nothing to improve their situation. The Ashburn couple had their American Express Blue Cash card limit cut to $5,900 from $11,300, just above what they owed. Sean, the primary account holder, said his credit score took a significant hit as a result because the closer an account holder is to being maxed out, the lower the score.
The couple had been trying to get a bank loan to consolidate their debt, which hovers around $15,000. Although they are both employed -- he is a retail manager, and she works as a recruiter and as a merchandising specialist -- they have been struggling with their $700-a-month credit card bills.
They were not able to get a loan because of Sean's credit score and their incomes. They protested to American Express, arguing that they had always paid on time and more than the minimum. "It's very frustrating when you're doing what you're supposed to do, when you're paying your bills and you get this negative action," he said.
The bank refused to reverse its decision. American Express officials normally do not talk about individual cases but agreed because Sean Craig gave written permission.
Desiree Fish, an American Express spokeswoman, said the company looks mainly at the customer's debt relative to income when making decisions about credit lines. The person's FICO credit score is also a factor. The company chose not to reverse its decision based on those factors, she said. "We want to be a responsible lender, and we want to make sure that card members are not spending more than they have the ability to pay," she said.
Tom Robertson, a Baltimore resident and a chiropractor, said he was recently notified by Bank of America that his limit would be reduced to $20,000 from $40,000 because of lack of use. Robertson said he has always paid his entire balance on time. Worried that the action would affect his credit score, he called the company. After a long discussion, he said, the bank agreed to increase his limit by $5,000. "I'm to the point where you never want to use a credit card," he said.
Consumer advocates and economists said borrowers who are struggling with debt should plead their cases to their creditors.
Balance-transfer offers with lower rates are not as prevalent now, but they are still out there. If you've received such offers and they don't require excessively high fees, call your card company and ask to speak to a supervisor. Tell him or her that you might have to take your business elsewhere.
If you don't have those outlets, simply tell the supervisor that you want to honor your debt but cannot do so without help.
Bank of America has modified about 1.3 million credit card accounts through such methods as rate reductions and reduced monthly payments since the beginning of 2008, said Betty Riess, a spokeswoman for the company.
Chase has increased the number of accounts in restructured-loan programs by 20 percent since 2007, said Stephanie Jacobson, a spokeswoman for Chase Card Services at J.P. Morgan Chase.
If you cannot get a better deal and you cannot pay your bills, you might have to turn to a credit counseling agency to negotiate a payment plan. But check with the Better Business Bureau, your state attorney general and local consumer-protection agencies to find out whether any complaints have been filed against agencies you are considering.
In the end, though, consumers will have to take charge and figure out how to pay down their debt, either through cutting expenses, generating more income or other methods.
"There is no alternative other than to bite the bullet and pay back their debt over time," Robertson said. "That's where we are as a nation."