Update: The new credit card law goes into effect in February 2009. Here’s an analysis of how it will affect balance transfer offers.
The House and Senate last week introduced two bills aimed at protecting consumers, especially young consumers, from “skyrocketing credit card debt, unfair credit card practices, and deceptive credit offers.” Senator Menendez (D-NJ) introduced the Credit Card Reform Act of 2008 (S2753–pdf download), and Representative Maloney (D-NY) introduced the Credit Cardholders’ Bill of Rights Act of 2008 (HR 5244–pdf download). Although both bills have there own nuances, let’s take a look at the Senate’s version.
Credit Card Reform Act of 2008
The Credit Card Reform Act of 2008 provides for the following provisions (as taken from a letter written to S. Menendez by various consumer organizations):
- Consumers under the age of 21 would be allowed to choose whether to receive credit card solicitations. Card issuers could only solicit young consumers if they receive affirmative consent in advance.
- Card issuers could not use the widespread practice of charging higher interest rates on balances incurred before a rate increase went into effect.
- Credit card issuers could not alter credit card agreements while they are in force without specific written consent from the cardholder. This will stop issuers from giving themselves the right in cardholder agreements to increase interest rates and fees “at any time, for any reason.”
- The bill would require that penalty fees be reasonably related to the costs that credit card issuers incur because of a late or over-limit transgression.
- Credit card issuers could not increase a cardholder’s interest rate based on adverse information relating to other creditors they find on the consumer’s credit report.
- Card issuers would be required to limit penalty interest rate increases to 7 percent above the previous rate if a consumer fails, for instance, to make a payment on time.
- The Act would prohibit late fees on payments that have been postmarked by a designated date.
- The bill prevents issuers from offering credit or raising credit limits to consumers unless they determine that the consumer will actually be able to make the scheduled payments based on their current income, obligations, and employment status.
- The bill requires lenders to make a firm offer of credit that includes specific — not deceptively low — terms, including the interest rate, fees, and credit line.
So is the Credit Card Reform Act of 2008 good or bad for consumers?
Let me say at the outset that this legislation is a typical beltway boondoggle. Credit card debt is up, housing is down, so Congress goes after the evil credit card companies. Never mind about the consumer who spends every dime he makes plus another 25% or so. Should fraudulent and deceptive practices be targeted? Absolutely, and we have plenty of laws and regulations to do so. The problem with the legislation, however, is that it takes aim at the wrong problem while creating several others at the same time.
It is true that credit card companies can increase interest rates, sometimes excessively (although states already have laws limiting the maximum interest rate that can be charged). And yes, credit card companies charge fees for late payments that greatly exceed the actual damage they suffer from the late payment. But there is a simple solution to this problem–consumers can either use the credit they have responsibly or not get a credit card in the first place. Are there circumstances truly outside a consumer’s control that causes them to pay a credit card bill late? Probably. But do we need federal legislation to tackle that problem?
This legislation won’t stop credit card companies from making the profit the market allows them to make. What it will do, however, is change how they do it. If you limit a credit card company’s ability to increase rates, they’ll just increase the starting rate. Balance transfer credit cards and cash back credit cards will probably be affected, too. The point is that credit card companies make what the market will bear. Apart from stopping deceptive and fraudulent practices, the government shouldn’t get in the way of the free market.
Here’s my question to Congress, why don’t you enact the Consumer Reform Act of 2008? Here would be its salient points:
- A consumer’s total used and available credit on all credit cards may not exceed an amount equal to 20% of their gross annual salary;
- All credit card charges must be paid in full before the next billing cycle except where (1) the interest rate charged by the credit card company is 0%, or (2) a true financial emergency prohibits payment of the full charges; and
- All high schools must offer and all high school students must take a course on personal finance, including how to use credit cards responsibly.
Do credit card companies take advantage of consumers in financial crisis? Sure. Should this be stopped if it constitutes fraudulent or deceitful practices? You bet. But blaming the credit card companies is, in my opinion, pointing the finger in the wrong direction.
So what do you think?
Now it’s your turn. What do you think of the Credit Card Reform Act of 2008?