Credit Card Reform Act of 2008–Congress to the Rescue
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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 Cardswill 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?
25 Comments, Comment or Ping
Philip
While I think you have hit the nail square on the head when you say that it is mostly on the consumer’s shoulder’s to decide if a credit card it right for them, I think that you are holding a double standard when you suggest that the government should force the consumer into rules about how much credit we can take and the like. I agree with you on the personal finance classes: they should be part of all high school curriculum requirements, but the federal government has no legal power over the state run education system (NCLB is the exception–an exception outside of the spirit of the constitution). If any government should do something about the credit woes of the US, it should be the state governments because the federal government is highly bound by the constitution into very specific roles (most of which it is overstepping, however). I think your ideas can also be applied to the loan crisis facing irresponsible homeowners lately as well. In my opinion, all governments, but especially the federal government, should be more considerate of the moral hazard principle. America was not founded on the backs of their government: let the people do as they wish, but pay if they make a poor choice.
Mar 17th, 2008
Taylor
Check it out… you can vote on this legislation and have your vote sent direct to your reps. That’s pretty cool
http://www.govit.com/H_R_5244/
Mar 17th, 2008
DR
Philip, I completely agree. My “proposal” was a (lame) attempt at humor, but to underscore how silly I think much of this legislation is.
Taylor, thanks for the link, that is cool.
Mar 17th, 2008
Brian
After reading the following “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. ” I can say is this will follow the housing crisis as people take out “NO Doc Credit Cards” Government creates more problems then it solves.
Mar 17th, 2008
Dima
Ha! That was a good one about the consumer reform, DR, made me laugh for a bit
Let also let the market do it’s thing instead of bailing out Bear Sterns with our money… Nah, those things would make too much sense and only the bad rich people can understand them.
Mar 19th, 2008
DR
Dima, now you’re making me laugh!
Mar 19th, 2008
Jim
The thing we don’t do any more in this country is strike. We have become a passive society to our detriment. What we need to do is strike on the credit card companies. By that I mean, don’t pay. If 1 million plus high balance, high credit rate people default in unison it would compound the mortgage and credit crisis to a point that would exact real change.
Look at congress scramble to do something about the mortgage crisis. See banks crumbling due to deceiving practices in mortgage sales. Credit cards are even more sinister.
It’s not legal to not pay. Some would say it’s a lack of responsibility. What I suggest is a strike. Take action.
Apr 18th, 2008
Truefire
The Credit Card Reform Act of 2008 is a good thing. I moved my finaces to a credit union eight years ago. Now that I know what quality service is, I realize what a mistake is was to use the Bank of America. For 22 years. I had to get on the phone with B of A nearly every single month to adjust my account.
I think public banks are for loosers. Anyone stupid enough to use one is probably stupid enough to need legal protection.
May 16th, 2008
Jan
I do not know who is sponsoring this website. However, I find it interesting that the write does not understand what an adhesion contract is.
Credit card contracts are adhesion contracts. That means, it is a “take it or leave it” proposition. With this economy, more consumers need fair lending practices.
This bill is fair. It is targeted to banning deceptive practices, that consumers are not even aware of - until too late.
Anyone believing that the playing field is remotely balanced does not understand what has happened with adhesion contracts. The consumer has no choice but to accept horrible terms, if he wants credit. And the terms have increasingly become not only outrageous but deceptive and hidden.
It is time for reform and reasonable regulation of credit card companies.
Urge your legislators to support this bill.
Jul 10th, 2008
Jan
While I am on this point - intelligent people understand why regulation exists.
Only the misinformed have bought into the far right wing’s definition of a “nanny state.” Only by treating you as idiots could this crowd have a chance at convincing you that it is a bad thing to create a more even playing field, and require fair contract terms when one party has significantly more powerful bargaining power.
Think again. Consumers are misinformed NOT because they are stupid but because credit card companies have become highly skilled at manipulation and deception. That must stop.
This is a good bill. Urge your legislators to pass it.
Jul 10th, 2008
DR
Jan, as a trial lawyer for more than fifteen years, I can assure you that I know what a contract of adhesion is. Furthermore, contracts drafted by one party, such as a credit agreement, are interpreted in favor of the consumer where any ambiguity exists. There are state and federal consumer protection laws aplenty in this country. Add to that the threat of class action lawsuits, and I believe we consumers are more than covered. The problem with consumer credit card debt, by and large, is not the credit card companies. It is the consumer. We need to stop thinking like victims and start taking responsibility for our own actions. While today such thinking may be labeled “far right wing,” years ago it was called being an adult. Funny how times change.
Jul 10th, 2008
Medieval Credit Card Law
Every owner of each credit card company which participates in such horrid practices should each be taken, tied to a cross, made to march through the streets until they get to town square, where a platform is set up. They should be taken, propped up on the platform and then cut from sternum to pubic bone so as to let their entrails fall out. Then, with two swift swoops, one severing the entrails from the esophagus and one severing the entrails from the anus, let the entrails drop on the platform before the dying eyes of the credit card company ceo/owner. Now swiftly, the entrails should be doused with a highly flammable liquid and set ablaze, all before the credit card company owner, while still aware of what is happening. Once they pass out, the body should be taken and each arm and leg tied to a rope and each rope tied to large horses, all facing in opposite directions. Once secured, a gun fired into the air so as to cause all four horses to charge in four separate directions, leaving behind the severed torso of the credit card company’s owner.
This will send a message to other credit card companies to treat their customers with the utmost dignity and respect.
Jul 22nd, 2008
DR
Medieval Credit Card Law, my specialty is not constitutional law, but I’m pretty sure this would run afoul of the 8th Amendment.
Jul 22nd, 2008
Will
Seems I read that in Italy they limit the credit cards from charging over 12% interest. I think the US should take the same steps. It’s good for the consumer and it is good for the credit cards. Most Credit card companies make matters worse. They see your in trouble, your having trouble paying, so bam they hit you 29% interest, $40 over the limit $40 late fees. Where is the common sense in that?
If the consumer is having trouble paying the Credit card companies should be encourage to work with them to prevent bankruptcy. But greed kicks in and they stick the consumer for all they can.
This causes the consumer to get into more trouble, defaulting on more loans. Getting more credit to pay off the bad. While this legislation may be a step in the right direction, it need to go further. The congress needs to stop letting Credit Companies become Loan Sharks.
Jul 27th, 2008
MR
DR, I am more than happy to pay my debts. Until 9/11 like many other legal Americans I was successfully employed. For 2 years post 9/11 I was unable to find work in the same field making the same money. Yes I used/abused my credit cards not for vacations or a new car but to pay for rent and food. In 2003 I once again became successfully employed and earning a higher than average income. Unfortunately in 2008 I am still buried in debt. I could have opted for bankruptcy but believe my debts should be paid. Every month for the last 5 years I have paid my credit card bills. The interest rate is 29%. I have tried over the years to negotiate a lower rate. Chase/BofA/Discover claim because those accounts are closed I am not eligible for a lower rate. Even with a 10% or 12% rate credit card companies would still make billions. The high interest rates are ourtrageous. It has been almost 10 years of working very hard and struggling. I guess it’s time to call a bankruptcy attorney.
Aug 6th, 2008
DR
MR, it sounds like you’ve worked hard to pay your debts. I am surprised that you weren’t able to either negotiate a lower interest rate or refinance the debt. A reputable bankruptcy lawyer should give you sound advice. Best of luck.
Aug 7th, 2008
Jo
I have no idea if anybody is still reading comments about this, but I just came across this after spending some time on the phone trying to get some relief regarding one of my fiance’s credit cards.
I know that we like to think that the reason that people have credit card debt is that they are irresponsible spendthrifts, and that certainly is true for many people. But….
I often wonder what percentage of credit card debt is accumulated due to unemployment, reductions in income at the same company, health care costs, and major home or car repairs. It is nice to think that everybody has a nest egg to pay for these things, but a couple of months of unemployment, a permanent reduction in income, serious health problems or big repair bills can make a huge dent in the most reasonable nest egg.
My fiance had no credit card debt in the spring of 2005. Nada. Unfortunately, he works for a company that is reducing pay across the board by playing around with various income plans. He has seen his income go down since 2002 as have most full-time workers for his company.
Now, he should be moving on, but he’s 55, a long-term employee and he now has health problems. He missed two months of work in 2006 due to ongoing health problems, and three months this year due to serious surgery.
He’s incurred about 8K of dental work over those three years (No, he did not neglect his teeth.. he’s always seen the dentist for routine visits.) He has also incurred health care deductible costs. And he has kept his old car… finally paid off in 2005, but an old car is an old car… they break down and they need to be fixed. No, public transportation is not an option for him to get to work.
Finally, we’ve had the usual home repairs… problems with hot water heaters and furnaces. And to just load it on, we just had a serious natural disaster and we are now in a FEMA disaster zone. Yep, the serious surgery, the car breakdown, and a FEMA-sized disaster all in the same year. We still don’t know if we will get anything from our insurance or from FEMA… we should, but we don’t have that money in our hands. And we had to get a new water heater and furnace and pay for them now.
I’ve been helping him with some of his bills, but there’s a limit to how much I can help him…. my car just broke down!
Do we live high on the hog? Nope, about once a month we go out for pizza. The loan-to-value on our home is less than 50%, even with falling home values. We have no new furniture nor much in the way of new clothes. I need new glasses and he needs shoes… we’re waiting.
He’s back at work full-time, but he can’t keep up with those credit card payments. We are trying to work things out with his creditors, but it is unclear as to whether or not he will be able to survive without going into bankruptcy. A home equity loan would be nice, but with his current income, our credit ratings not that great due to his health and employment situation, and the current credit situation, it’s doubtful we will be able to get a home equity loan, even with a 40-50% loan-to-value home.
So…
I think it is always easy to be smug about people with credit card problems. But unless you’ve got 100,000 grand sitting somewhere and an extra income to tide you over any gaps in employment, any of us can be stuck in credit card hell within a year or two.
I think this bill is basically a good idea.. it hasn’t moved of course, and Googling the bill shows that banks were lobbying against it (not much of a surprise). But credit card debt is part of the whole house of cards now, and it isn’t being addressed… because of the idea the credit card debt is tied into irresponsibility. Well, not always. As more people are laid off, as more companies find more ways to reduce their employee’s income, as more stressed-out people wind up ill, credit card debt will just keep making things worse.
We need more fair practices in credit card lending.
Oct 8th, 2008
Paul Davis
Whole thing is moot, credit cards died with passage of the bill two years ago, and the corpse simply requires burial.
Just start from a simple premise, people are not fools! Got that? Then follow this, the changes in the bankruptcy law changed credit cards from unsecured debt to secured debt, secured by the future earnings of the card holder. Such being the case, credit cards are no longer a good deal, and they are now being paid off and shunned by the vast majority of the population, including myself, who has paid off three in the last two years. One more to go and no more, apart from a tiny balance card I use for ordering over the internet, so predators don’t have a line on my bank account.
To put it simply: Unsecured debt at 12% = Great deal, 16% Ok deal, 23% barely tolerable. Secured debt at 12% = barely tolerable, over that it’s insane. By pushing for this bill, credit card companies cut their own throats. It also doubtless increased the mortgage crisis, since you can’t walk away from “unsecured” debt and keep your house now, people walk away from the house and work on paying off the formerly “unsecured” debt.
Horrible law that actually will have a good effect in the end. And I cry no tears for the credit card sharks.
Doubt any of this? Go check the facts, come back and prove me wrong. LOL. Be sure you check how much AMEX is making now, it’s pretty funny.
Oct 8th, 2008
tomtrail
Pass credit card reform act of 2008 - Congress to the rescue thank you, tom trail
Oct 8th, 2008
Dana
Advanta recently raised my business credit card interest to 31%! I have almost 10K in business debt on the card and have been a customer for over 4 years. My payments have been on time. There is no reason for this interest rate except outright GREED! I called to negotiate a lower rate and a supervisor told me “no other interest rate is available.” Avoid ADVANTA and please let this credit card reform act of 2008 pass!
Nov 4th, 2008
DR
Dana, credit card issuers have been raising rates as the credit crisis spreads to the card industry. While I haven’t experienced a rate increase, if I did, I’d look to transfer the balance to cards that offer 0% introductory rates on balance transfers.
Nov 4th, 2008
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