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The Credit Card Industry

Nancy Trejos
Washington Post Staff Writer
Monday, May 18, 2009 1:00 PM

Washington Post staff writer Nancy Trejos, who also co-writes the Small Change blog, and Adam Levin, a consumer credit expert and founder of Credit.com answered questions on Monday, May 18 at 1 p.m. ET about the credit card legislation moving through Congress and its potential impact on consumers and card companies.

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Nancy Trejos: Hello everyone. Thanks for joining our chat today. This is a big week for the credit card industry. The Senate is scheduled to vote on a bill that would ban several industry practices such as arbitrarily raising interest rates on existing balances. I am joined today by credit card expert Adam Levin. He is the founder of Credit.com and the former New Jersey Consumer Affairs Director. We're eager to answer your questions.

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Mount Air, Va.: I bought a Freezer from Sears on my Sears Mastercard (Citi). The first bill came in with a 28 day grace period but Sears had not entered the transaction under the special no payment/no interest for 12 months promo that I bought the freezer under. Second bill came in with promo noted but now the grace period had automatically dropped to 20 days (I called Sears to confirm this). Call me paranoid but I think they do this so that customers will miss the new due date and default on the promo allowing Sears/Citi to collect on fees. Will prohibiting this practice be part of the new rules?

Adam Levin: You're not paranoid. It's a given that issuers make more money when people miss the due date and end up losing the interest free promotion. The Fed Rules that go into effect July 2010 will require issuers to mail statement at least 21 days in advance. Both the House and Senate bills address this as well. Watch those due dates in the meantime.

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Washington, D.C.: I've never been late with a payment but last month, Bank of America claims they didn't get my check. What can I do?

Adam Levin: The Fair Credit Billing Act allows you to dispute a payment that was not properly credited. It's a bit tricky if you don't have proof that you sent it, but I would encourage you to exercise your rights under that Act. The most important thing to do is to put your dispute in writing to the address for billing errors on your statement, and send it certified mail, return receipt requested. Tell them the check # of the check you sent, the amount, and the date you mailed it. You'll find more details about this consumer protection law here: http://www.credit.com/slp/chapter5/What-to-Do-About-Errors.jsp You may want to also CC: the Office of the Comptroller of the Currency. Some consumer law attorneys suggest getting your letter notarized so it will be taken seriously.

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Anonymous: Recently I rejected an attempt by Bank of America to increase my APR and fees. On my next statement I noticed the payment due date had been advanced one week. If my next payment had been late, would that entitle Bank of America to increase my APR and fees?

Adam Levin: We've received quite a few complaints about credit card issuers changing due dates on our blog at Creditbloggers.com. If you miss the change, you are late and that means a late fee and/or higher interest rate on your outstanding balance. And yes, that's perfectly legal (at least until a new law is passed and/or the Fed rules go into effect in July 2010.) It's a good idea to check your statements the moment they arrive to confirm the due date, interest rate, and credit limit.

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South Riding, Va.: Any time I hear talk about changes to the laws on how credit cards work, I wonder what it means to me. I am one of the people who pays the balance in full to avoid interest and fees. I know I have heard reports in the past of the credit card programs with points/rewards eliminating users who don't carry a balance because they don't spend enough (allow the company to make enough). Will changes mean fewer cards with no annual fee and rewards?

Nancy Trejos: Good question. I've talked to several industry experts who predict that these new regulations are going to transform the way the industry conducts business. Credit card executives have warned that they will lose more money if these rules go into effect. They say that would force them to increase interest rates or withhold credit. Proponents of credit card reform say that is just a scare tactic. But many experts do believe that credit card companies will end up scaling back rewards progams and charging annual fees. Before deregulation of the credit card industry back in the 1980s, card companies charged everyone 18 percent interest and annual fees. We could end up going back to that type of model. Already, we've seen many card companies cancel rewards programs.

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Arlington, Va.: Can you explain how "available credit" works with my American Express charge card? It isn't a credit card, but an old-school, pay off everything every month card. The card doesn't have a credit line, as AMEX doesn't tell you how much it will let you use every month). So, I don't know if the $4-5,000 I spend and pay every month (I charge a lot to get points) means I look like I'm maxing out my card, or if there is plenty of room to run.

Adam Levin: America Express charge cards are coded on credit reports as "open." Therefore, they are viewed differently than revolving cards where your level of utilization would be a factor.

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Annandale, Va.: Are there any real costs to the credit companies behind those rapidly spreading foreign transaction fees? I find it hard to believe consumers were getting a free ride for all those years prior to their introduction.

Adam Levin: Though I am not an expert on the foreign transaction fee issue, I think it represents a pure profit center. We all know that credit card companies never met a fee they didn't like. Especially fees that cost them little to nothing.

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Washington, D.C.: Is there any rule of thumb about how much available credit I should have...a percentage of salary, of monthly costs, etc.? I currently have a AMEX charge card (bill payable in full every month) and a single Visa card with an $11,000 credit line (no outstanding balance). I'm wondering if that is not "enough" credit and therefore is having a meaningful difference on my credit score.

Adam Levin: What would be more important is the level of activity and the amount of credit you are actually utilizing. In your case this would not seem to be an issue.

Nancy Trejos: Your credit score is calculated based on five main factors. The most important one is your payment history. Have you paid your bills on time? Next is the amounts you owe. That includes something called a credit utilization ratio. That is the proportion of the credit lines you have available that you have used. Then there is the length of your credit history. That's the time since accounts have been opened. The longer accounts are opened the better. There there's new credit, or the number of recently opened accounts and proportion of accounts that were recently opened. If you try to open too many new accounts at the same time, you start looking like a risky borrower. Finally, there is types of credit used. That is the mix of credit you have, such as credit cards, retail cards, mortgages. So if you've done well in all these areas, your score should be fine.

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Anonymous: Why is the Congress offering banks from 9 months to 14 months to implement this credit card reform bill? Senator Sanders amendment failed badly on the floor. Do you think any other Senator will another bill to cap on interest rate this week?

Adam Levin: Remember the Fed regs won't go into effect until July 2010. Congress is just being Congress. The implementation period represents a compromise - that's how these things get done. I am not convinced anyone will try rate caps this time around. No one wants to derail the legislation.

Nancy Trejos: At first the credit card industry vehemently opposed the Federal Reserve's new regulations. Once it became clear that the Fed was going to approve them, the industry turned to arguing that banks would need a lot of time to implement the changes. They said they would have to change their computer systems and make other logistical changes. The Fed made that concession to them. Both the Senate and the House bills that are being considered would accelerate implentation but only by a few months. I don't think any other Senator will try to get a rate cap approved. I agree with Adam. I don't think there are enough votes for a rate cap, and the Senate wants to get something approved this week.

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Rockville, Md.: Some times when I do not trust the card company and can not pay off a bill I have two factors on my side.

I use Check Free - a free service of my credit union (NFCU) and they have business records to prove payments were made on time and I make two payments each cycle and each above the minimum. There is no way they can claim a payment was late. Paranoid? Of course, but it makes me feel safer.

Adam Levin: Feeling safe is always a good thing.

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Arlington, Va.: I've been with my credit card company for about 15 years. My record isn't perfect, but I have decent credit score (above 700), but i also have a couple late payments. In the last few months, like everyone else, the interest rate has gone up and they lowered my limit, which means my finance charges more or less butt up to the limit -- i've been trying to pay down the card since January and have hardly put any new charges (except for a monthly automatic gym fee) on it.

In the past, I've been able to call the credit card company and use my time and good standing as leverage to lower interest rate by threatening to go to a lower interest credit card.

Will this strategy still work in the current economic climate?

Adam Levin: Credit.com has been contacted by quite a few consumers recently complaining that attempts to negotiate a better rate deal have backfired. Proceed with caution.

Nancy Trejos: It doesn't hurt to try to negotiate with them. I would call them up, ask to speak to a supervisor, tell them you have other cards you can switch to or simply tell them that you really want to honor your obligation but you need help. Credit card companies are under a lot of scrutiny right now. Some of them might be willing to negotiate with you, if anything, so that they won't appear to be forcing more Americans into bankruptcy. Many of the banks have lowered interest rates or minimum payments or modified the loan in other ways. But Adam is right, some of the banks might not be willing to do it.

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Princeton, N.J.: This isn't quite on topic, but it's close.

My bank unilaterally lowered the valuation of my home by about 50 percent and then reduced the credit limit on my home equity loan to my balance.

O.K., but what I want to point out is how they treated me when I tried to discuss this. They refused to give me any information as to how they arrived at this valuation change. They said that if I wanted a real appraisal, I would have to pay them an outrageous fee and use their appraiser whom they would not identify. It would appear that using an appraiser whose business comes through the bank is a clear conflict of interest. Also the bankers at my local branch who arranged the loan in the first place had no knowledge of this and no ability to discuss it. They only people I could contact were young PR types who could only recite what I already knew.

This is extremely short sighted as I have been a good customer of this bank for a long time, but as soon as the situation allows, I will transfer my business to another bank.

Adam Levin: The OCC is currently investigating these typse of complaints. I recommend you go to www.occ.gov

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Washington, D.C.: If I pay every two weeks on a credit card with a big balance, shouldn't the interest rate go down as well? If the minimum payment per month is $120 and I pay $150 every two weeks, why do they then send a bill saying "nothing is due" aren't I still charged interest?

Adam Levin: You can save a bit of money by paying every 2 weeks, or better yet, paying the minute you receive the bill. Interest is still running on the existing balance.

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Annonymous: In the past year I have gone from paying my one credit card off each month to having several credit cards which are now delinquent because of loss of income. I find the interest rate-gouging I'm facing unfair and unilateral to say the least. I have never paid 25 percent interest on anything. I flat out refuse and am strongly considering walking away from my debt. It's absurd that card issuers won't work with people in a (temporarily) bad position who were once great credit risks for them.

Adam Levin: I understand your frustration, however, walking away from debt will cause you even more pain in the long run. Feel free to visit Credit.com for a reputable organization that can help you find a better long-term solution.

Nancy Trejos: Yes, walking away from the debt could hurt you in the long run. Your credit score would be damaged and accurate negative information can stay on your credit report for up to seven years. If you're having a hard time paying your bills on time, it is best to go to a credit counseling agency. There are many out there so make sure you go with a reputable one. Check with the Better Business Bureau, your local state attorney general or consumer protection agency to find out if any complaints have been made against them.

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Boston, Mass.: Most of my credit cards have changed the way the interest is calculated so that, now, interest is compounded daily. (Wish I could find that deal in a savings account)

If the interest rate on the card is is compounded daily, is that reflected in the APR listed on the agreement? In other words, if compounded daily, would the actual interest paid be higher- even if the rate of interest remains the same?

If so, will making this clear to consumers be part of the new legislation?

Adam Levin: Depending on how you spend and pay back your card, your effective APR could be different than the rate published in your statement. Emily Peters wrote a interesting article on our blog at creditbloggers.com

http://www.creditbloggers.com/2007/04/reader_question_1.html

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difference between a loan shark and credit cards??: Now it would be hard to tell the difference. I think the loan sharks have been put out of business due to pay day loans and using your car as collateral and the credit card industry.

The public may be shocked to know that credit cards were not available until the 1960s. So you were forced to put things in layaway or save up or not purchase items when you didn't have cash.

I am happy that we try very hard not to use our credit cards and when we do we pay them off at the end of the month. So that means no new clothes for six months, etc., cause I need to save money for new tires or a vacation.

(did you hear that Cashpoint can no longer do business in D.C., some violation of credit terms)

Adam Levin: Just remember, if you don't carry a balance, the rate is rarely - if ever - an issue.

Nancy Trejos: I applaud you for paying your balance off each month and not spending above your means. I think Americans got in way over their heads. There was too much credit made available to them. They were able to afford lifestyles they otherwise would not have been able to afford. Now, they're losing their jobs, they're losing those big homes they bought, they have too much credit card debt. Perhaps, this whole episode will change the way Americans view credit cards. Perhaps, we will start living within our means.

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Washington, D.C.: Since many of the proposed regulations won't take affect until 2010 -- are there any ways consumers can feel relief sooner? It seems detrimental to our economy, if consumers are being held hostage by high interest rates and lower credit card limits. For our economy to grow, don't we need an easier flow of credit?

Adam Levin: There is no question that we need to spend our way out of this recession. Unfortunately, it would appear the best we can get 9 months until reform is implemented, but you never know what magic can happen on the floor of the Senate.

Nancy Trejos: You're right. The only part of any of the bills that would take effect sooner would be the requirement that card companies give borrowers 45 days' notice before increasing the interest rate. I'm afraid people who are already in debt right now won't get much relief. There's speculation that the card companies will take advantage of the next 9 to 12 months and keep hiking up rates and slashing limits. Others think they will realize how bad a PR move that would be and comply with some of the rules beforehand. We can't predict what will happen. Either way, the best the thing a borrower can do is call up the card company and plead his or her case.

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Arlington, Va.: I'm not trying to be flip here, but I think things HAVE to change in this country regarding unsecured debt. The nonchalance of people regarding the money THEY OWE which is money THEY SPENT just amazes me. Maybe that kind of "credit" SHOULD be harder to get.

Seriously, if you can't afford it, maybe you should not buy it. Is that such a radical though?

Adam Levin: It is not radical at all. We all got ourselves into this mess. Financial institutions threw credit at everyone all the time and continued to encourage debt increase through things such as convenience checks. Consumers clearly responded and went on a credit binge. And, government allowed the Wild West. Hopefully, as we emerge from this mess, we will all work together and push for greater transparency and true financial literacy.

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Washington, D.C.: Hi -- do you know if anything in this impending legislation addresses the so-called "interchange" fees that merchants have to pay to credit card companies for each customer purchase? I've heard that these fees have been going up pretty hardcore the last few years, and they make it difficult for smaller shops and independent owners to accept credit cards.

Adam Levin: Not in this legislation.

Nancy Trejos: There was an effort in the Senate to do something about the interchange fees in their bill, but that was dropped. I'm not sure if it will come up again.

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Woodbridge, Va.: Much has been written of late on the pitfalls and advantages of credit, most specifically, credit cards. I've been using credit since the 1970s, when department stores began issuing credit cards more earnestly, including JC Penney, Sears and Montgomery Ward. As a then young adult, single parent, minimum wage worker and full-time student, I relied on credit for true emergency use including car repairs and diapers. One year I decided to expand my horizons and charge Christmas gifts for my family. After it took two years to pay off those purchases, I swore off all such forays.

As I've matured and my own use of credit has evolved, what has been increasingly clear to me is that the credit industry has become omnipotent and not in a good way -- its ability to shape not only its own financial kingdom, but the very reputations and autonomy of its customers. There was a time when not having to use credit was a sign of strength. Now, not having a credit history makes you a pariah, unable to function in society or business. Tried to rent a car lately without a credit card, or guarantee a hotel reservation, or even purchase a drink on an airplane? (United Airlines no longer accepts cash for snacks or drinks on its domestic flights.) You can be found ineligible for a loan because you have no prior credit. How have we come to this?

I recently moved into a new townhome. The landlord stated that my credit score was low and she therefore wanted an extra month's deposit from me up front, meaning I'd have to come up with nearly $5,000 to move in. I was astounded because I had always considered myself a good credit risk and knew I paid my bills on time, including the mortgage for my own house in Washington state, on time. So I separately purchased my credit score, only to find it was 200 points higher than the score she'd obtained. Confused, I contacted the real estate firm she'd used to get the score, whereupon I was told that there isn't just one score. hey said it depended on who did the scoring (Fair Isaac was once reigned supreme, now all three credit bureaus primarily use VantageScore), the scale being used, the percentage of weight applied to each credit factor (credit limits, amounts owed, payment history, etc.), and most surprisingly, what type of credit you were applying for. What I was told very clearly was that there are different scores for different reasons; applying for a mortgage might earn you different score than applying for a new insurance policy.

The report stated my "average loan amount" was too low. In other words, keeping the amount I borrow to reasonable levels is held against me. Next, it told me that the balance I paid down across (my) open real estate accounts, such as a mortgage, is too low. Let me get this straight - paying the monthly amount due on my primary mortgage without a single late payment in the entire life of the loan is a bad thing, while paying almost double the amount due on my second mortgage account every month counts for nothing? Next was a ding for having low limits of available credit. Wow. Having been the victim of a crime some years ago, wherein a credit thief decided that my unused limit of $7,500 on a credit card was too tempting to resist, I had purposefully lowered the limits of some cards to avoid similar future incidents. Didn??t this protect both me AND the bank? Lastly, the report showed that the ??ratio of balances-to-credit limits across (my) open credit accounts or loans was too high.?? I have one card with $2,000 charged to it for graduate school tuition, and the limit on that card is $18,000. Another $10,000 limit card has a zero balance. The only other card with a balance is one with a $10,000 limit that has $5,500 balance on it (representing cross-country moving expenses for a new job), which I shifted there to enjoy a zero percent interest rate for 12 months. I fail to see how the way in which I've managed my credit has earned me this mediocre label.

I consider myself an honest, hard working, responsible adult who does not over-indulge in material things, extravagant luxuries or reckless spending. It's bad enough that these credit agencies can assign a grade to my integrity and reputation that is ill-deserved. It's worse that insurance companies, potential employers and others can and do rely on these same tainted characterizations to decide what kind of person I am, what risk I pose, and how reliable I am. I have no direct way to change my credit score except to try to understand the myriad of mysterious and confusing factors used to calculate it, and even then there is no guarantee I will succeed. I'm ready to chuck it all, obliterating all credit cards entirely, and reverting back to the "old fashion system" of cash only. But if I did that, how could I buy a glass of wine on my next cross country flight?

Adam Levin: I understand your frustration. It would appear that you have done everything right. This points up a flaw in the system. The need for greater transparency and financial education.

Credit is a portfolio. It needs to be managed like an investment portfolio. And, consumers need to be presented with all the facts so that they know how things work and how to maximize their credit dollars.

We are a credit society. We can never return to the cash cave. As to that glass of wine, well, there is always the debit card alternative.

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marital credit scores: This is a bit off topic but could you tell me how companies compute the credit score of a married couple? I was married 4 months ago and I'm curious if our credit scores become "one" or if banks/companies just look at us individually. We both have stellar credit, so I guess I'm wondering if two A's = A+ ?

Adam Levin: Credit scores relate to individuals.

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State Jurisdiction over Fees: Does this bill end the insanity of giving states exclusive jurisdiction over late fees? My understanding is that the banking act of 1860-something gives North Dakota the right to deem $40 late fees "reasonable" and other states cannot stop them. Please tell me this is fixed in the latest bill.

Adam Levin: The Senate bill does not cap fees but it does say that they must be reasonable in relation to the cost. The definition of "reasonable" is open to interpretation and can be a slippery slope.

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Sterling, Va.: In the past month I've had 2 credit cards closed by the issuer for lack of use on my part.

I have about 10 cards but only actively use about 2 and always pay off my balance in full each month.

Should I be concerned that the closing of these accounts will negatively affect my credit score?

Adam Levin: It may impact your credit score, but there is little you can do about that. If your credit score is strong, it may only have a negligible effect.

Nancy Trejos: One factor that is used to calculate your credit score is your credit utilization ration. That is the proportion of the credit that is available to you that you use. In other words, the closer you are to being maxed out, the lower your score will be. So, yes, your score could take a hit if you've got less credit available to you but that will depend on how much of that credit you are using.

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Bethesda, Md.: I hear the card industry say that this bill will limit credit. I've dont nothing wrong and don't want to pay more because some people borrowed too much. I don't own a flatscreen tv.

Adam Levin: The reality is that we are all in this together. When consumers take on debt they can't afford, we all pay.

Hopefully, common sense will ultimately prevail. However, we needed to take the first real step to inject fundamental fairness into the system. Greater transparency and certainty is good for consumers and business alike.

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Herndon, Va.: Adam said "There is no question that we need to spend our way out of this recession."

Isn't rampant spending what got us into the recession? People bought alright...homes, cars, vacations, etc and had nothing in savings. Now that people are losing their jobs (or scared their job is on the line) they have no way to pay their bills.

Encouraging people to spend, spend, spend is not a good thing. We can't all live the lifestyle of the rich and famous.

Adam Levin: I agree but recessions don't simply end. Consumers need to help us out. There is a difference between irresponsible spending and healthy spending. It is not about the rich and famous, it is about returning to basics.

Nancy Trejos: Unfortunately, our economy is highly reliant on consumer spending. But I would encourage people to spend responsibly. Don't buy anything you can't truly afford.

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Alexandria, Va.: We have some store credit cards (JCPenney, Best Buy) that have less than $500 credit limits. Will our scores get hurt if we cancel them? We have one credit card with over $10,000 in credit limits. We will keep that one.

Adam Levin: It is hard to predict with small balance store cards. Rather than close them, since they don't charge annual fees, just shred them.

Nancy Trejos: Yes, it's such a small amount that it's hard to say. It will also depend on how much of all your available credit you have used. There's a ratio that is calculated. The closer you are to your limit, the lower your score.

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McLean, Va.: Do you have a sense of how many card issuers are going to billing cycles of 21 days? I noticed that Barclay's is doing that on an affinity card I have with a certain very large and well known online-catalog retailer. I've told both Barclay's and the retailer that I am not amused with this "gotcha" tactic ("Gotcha" is the extra number of billing cycles per year, plus the higher probability of not making the payment on time and incurring the penalty fees), and will henceforth use the card only when I purchase from the affinity retailer so I can get free shipping. Card issuer won't get any other business from me, so they won't realize any merchant transaction fees.

Will it make a difference? I don't know. But if many people do this, perhaps either the retailer or the card issuer might get a message. When enough customers boycott bad card issuers and deny them both interest payments and merchant transaction fees, maybe they'll change their behavior.

Adam Levin: We have received a number of complaints about this issue. Credit card companies have been shortening billing cycles and moving due dates. This is of great concern. The Fed regs require the bill be MAILED 21 days before the due date. Depending on the final legislation that period may be extended. Mailing date is different than billing cycle. Just proves that these companies are very creative and are looking to always stay one step ahead.

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Predatory Lending: What does this legislation do to stop the predatory lending practices? I sat and watched a credit card salesperson tell many many students that their student loans qualified as income and could be used to justify giving them credit. The credit cards then use the high default rate to justify piling abusive rates on everyone else.

Adam Levin: The Senate bill will restrict marketing credit card offers to students. If enacted, it would require evaluation of the student's actual income and/or parental consent to be responsible for their bill.

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McLean, Va.: Let's mention the latest scam perpetrated by the credit card issuers: the low APR balance transfer -- aka, the large print giveth -- with the upfront 3-4 percent, no limit, balance transfer fee -- aka, the small print taketh away.

Take the time to do the math and you'll usually find that, for the low APR period, your effective interest rate, when both the APR and balance transfer fee are included, comes out much, much higher.

Scam-scam-scam.

Adam Levin: That's why it is critical you read the terms of the deal. Remember, even if the print is bolder, brighter, bigger and more prominent, if consumers don't read the language and understand its impact, this is all for naught.

Nancy Trejos: Indeed, consumers have to be vigilant. Read the terms of your contract. Study your credit card statements. The rules are going to change, but we also have to do our part to protect ourselves.

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New Orleans, La.: It seems most of the recent media attention about credit card reform has to do with protecting consumers from moving due dates, jacked-up interest rates, and other matters related to billing -- The Credit Card Holder's Bill of Rights, as it were.

Has there been any development on The Credit Card Fair Fee Act that has the goal to get interchange rates under control?

(For the uninitiated, stores might pay around 2 percent of a purchase price to run your credit card. So if you're making an $100 purchase, the store only nets $98. Many people feel these so-called interchange fees are too high.)

Adam Levin: I think the focus, in light of public outrage over credit card industry practices, is on the current suite of legislation. I have no doubt that interchange fees will be next up on the agenda.

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Nancy Trejos: Thanks everyone for all your thoughtful comments and questions. I'm sorry if we couldn't get to all of them, but we appreciate your interest in this topic. I'll be following the action on Capitol Hill this week. The Senate could vote on the bill as early as tomorrow. Please come back to washingtonpost.com for updates. Thanks.

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