Let’s suppose I loan you $1,000 and we agree that you are going to pay 7% interest per year on that loan until it is fully paid back. Then, three months later, I tell you that you have to pay me 23% interest on the loan. You would presumably be very upset, and justifiably so, as I would have broken my end of the bargain in order to increase my financial gain.
Yet this is exactly what credit card companies used to be able to do. They hook a customer in with a low-interest rate and wait for them to make some charges to the card. Then the company raises the interest rate on the existing balance to as high as 32% with little to no notice. While such interest rate escalations helped the industry make $40.7 billion in profits in 2007, they are not fair to consumers who made the charges on the belief that they would be subject to the lower interest rate.
The credit card industry, however, is no longer able to jack up interest rates on existing balances thanks to the Credit Card Accountability Responsibility and Disclosure Act (“Credit CARD Act”), passed by the Democratic Congress and signed by President Obama in 2009. According to a great fact sheet by Consumer Action, the credit card industry is now forbidden from raising interest rates on existing balances so long as you pay your bill on time. In short, your credit card company can no longer break their end of the deal simply to make more profit.
As Consumer Action explains, the Credit CARD Act also establishes other consumer friendly protections. For example, the Act:
- Requires a credit card company to provide its customers with 45 days notice before raising the interest rate on new balances charged to a card.
- Generally forbids the company from raising rates during the first year that an account is open.
- Requires that, if you have credit card balances subject to different interest rates, any amount you pay over the monthly minimum payment must be put toward the balance subject to the highest rate. Previously, the industry would typically put the payment toward the balance with the lowest rate.
- Requires your credit card company to mail your bill to you at least 21 days before payment is due. Previously, the law required only 14 days.
- Forecloses your credit card company from charging you a fee if you go over your credit limit, unless you specifically opt-in to be able to pay a fee to go over the limit. The company can, of course, deny the over-the-limit charge.
- Requires additional and clearer disclosure of the terms and agreements that govern a credit card.
- Requires that people under 21 years of age either have a co-signer or proof of independent income in order to get a credit card.
A recent study of the first year of implementation of the Credit CARD Act found that, while some concerns remain about the credit card industry, the Act had been successful in eliminating many troublesome industry practices.
A primary role of government is to establish the rules needed to ensure that consumers are treated fairly in the marketplace. In order to achieve this goal, customers must be provided complete and accurate information about agreements that they are entering into, and assurances that such agreements are fair and will be complied with by industry. For too many years, the credit card industry had failed to satisfy these basic tenets of economic fairness. It is great to see President Obama and the Democratic Congress take a large step toward requiring the credit card industry to do so.
Do you support the credit card industry reforms passed by President Obama and the Democratic Congress? If so, send a letter to the editor thanking President Obama and the Democratic Congress for beginning to require the $40+ billion credit card industry to treat its customers more fairly and evenhandedly.