Why credit card issuers are upset about new consumer protection rules
OnlineGuideTo.com — The Federal Reserve and two other regulating agencies at the start of May, 2000, proposed a set of new rules and regulations aimed at stopping “unfair and deceptive” practices in the credit card industry.
“The regulations are aimed particularly at the more than half of all credit card holders who don’t pay their bills off every month, putting them at greater financial risk during an economic downturn. The Fed calculates that Americans carry $951.7 billion in revolving credit debt,” writes the Baltimore Sun.
According to a report by the Associated Press, the new rules would prohibit:
- Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay;
- Unfairly allocating payments among balances with different interest rates;
- Retroactively raising interest rates on pre-existing balances;
- Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account;
- Unfairly computing balances in a computing tactic known as double-cycle billing;
- Unfairly adding security deposits and fees for issuing credit or making credit available;
- Making deceptive offers of credit.
- Source: Jim Abrams, Fed OKs plan to rein in unfair, deceptive credit cards, Associated Press, May 2, 2008
Consumer protection groups generally praise the proposed rules, but they also point out they do not go as far in protecting customers as several reform bills pending in Congress.
Naturally, credit card issuers are not pleased at all. After all, credit card holders who do not pay off their debts each month are their bread and butter.
Ken Clayton, senior vice president of card policy for the American Bankers Association, described the proposed changes as “aggressive regulatory intervention in the marketplace that will result in higher prices and less consumer credit.”
“If card companies cannot fully reflect risk, then millions of consumers with good credit histories will end up with higher rates,” the ABA’s president and CEO, Edward L. Yingling, said in a statement.
- Source: Jim Abrams, Fed OKs plan to rein in unfair, deceptive credit cards, Associated Press, May 2, 2008
Are you a “preferred customer”?
A “preferred customer,” according to one MasterCard vice president, is someone with a “taste for credit” who’s “willing to make minimum monthly payments—forever.”
A couple of years ago the Wall Street Journal wrote, “The credit-card industry has a problem: Although Americans are deeper in debt than ever, they are paying off bigger portions of their monthly credit-card bills.
For card issuers, which profit by collecting interest on unpaid balances, that’s bad news.”
Credit card companies have been very creative in finding ways to squeeze more money out of their customers.
One way they do so is by penalizing late payments with maximum interest rates.
Even if you do pay on-time credit card companies may suddenly raise your interest rates — often unnoticed by you.
Loans so big you can not pay them off
David Lazarus, who writes the Consumer Confidential column in the Los Angeles Times, says:
I just love it when the credit card industry threatens to take its toys and go home.
That, in effect, was what card issuers said in response to the announcement by federal regulators last week that they planned to crack down on some of the industry’s more consumer-unfriendly practices.
[...]Edward Yingling, president of the American Bankers Assn., said in a statement that the Fed’s proposals represent “an unprecedented regulatory intrusion into marketplace pricing and product offerings.”
He said the measures would “result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards.”
In other words, if the industry had to play by the proposed rules, it wouldn’t be able to offer as much plastic to as many people.
Nonsense. No amount of regulation has ever resulted in card issuers scaling back their offerings. More than 5 billion solicitations were mailed to U.S. households last year alone.
But if banks suddenly decided not to make plastic as readily available to people with spotty credit records, fine. All things considered, that would probably be a good thing.Just ask Victoria Ramirez. The San Jose elementary school teacher once had as much as $45,000 in debt on six different cards.
Now she and her husband have whittled that down to a balance of about $10,000 on a single card.
Ramirez, 37, said card issuers make it all too easy to get into trouble.
“They loan you a big amount of money that you can’t take care of,” she said.
This isn’t so different from what’s happening in the housing market. One reason so many people are in danger of losing their homes right now is because banks handed out high-risk loans to folks who had no business getting deep into debt.
To be sure, many such loan recipients deserve a share of the blame for being so reckless with their personal finances. But they wouldn’t have gotten into trouble without the willing complicity of lenders, which encouraged virtually all home buyers to take the plunge, regardless of their ability to repay loans.
- Source: David Lazarus, Banks’ credit card bluster rings hollow, Los Angeles Times, May 7, 2008
