Stronger Consumer Protections Needed
It’s true, there are some things money can’t buy.
In an increasingly cashless society, we rely on credit cards to conduct many common transactions, such as booking flights and ordering things online. Credit cards also can add a level of security that is lacking with other forms of payment; if someone steals your wallet, you can kiss your cash goodbye, but you can always replace a credit card. And who hasn’t been thankful for the financial safety net that credit cards provide during an unexpected emergency?
Credit cards have become indispensable to most working Americans, but they’ve also propelled consumer debt to record levels. The average American family now carries more than $8,000 in credit card debt — and that number is only expected to rise as consumers confront the crumbling housing market and no longer can refinance their homes to pay off credit cards or other debts.
College students are particularly susceptible to credit card debt. According to Nellie Mae, the average undergraduate now has $2,200 in credit card debt, and that figure jumps to $5,800 for graduate students. More and more college grads are stepping into the real world shouldering a pile of debt they can’t pay off with their low-paying entry- level jobs.
It’s not just young people who are struggling: Americans age 65 to 69 more than tripled their credit card debt from 1992 to 2001. In fact, the number of older Americans filing for bankruptcy also tripled during that time period, making boomers the fastest-growing group landing in bankruptcy courts.
Adult cardholders who choose to live beyond their means certainly deserve their share of the blame. But some credit card companies may have helped fan the flames of consumer debt by extending lofty lines of credit to low-income applicants, hitting cardholders with surprise rate hikes and hidden fees, and engaging in deceptive practices such as double- cycle billing and universal default.
Credit card companies today also rely on “risk-based pricing” instead of the relatively standardized interest rates of the past. This means that card companies set rates according to a wide variety of factors that are supposed to reflect how likely — or unlikely, as the case may be — individual cardholders are going to repay the money they have been loaned.
Card companies argue that this risk-based pricing helps customers who could not otherwise qualify to have a credit card and rewards responsible customers with lower interest rates. Consumer advocates argue that it makes no sense to give someone credit that they’ll never be able to repay, and they point to the billions of dollars in late fees and confusing penalty charges as evidence that cardholders have little control over the rates and fees they pay.
In recent months, I have held subcommittee hearings and countless meetings with card companies, federal regulators, consumer groups and cardholders to get to the bottom of our nation’s credit card debt crisis. Most of the complaints I heard centered on what consumers see as arbitrary and unfairly high interest rates and penalty fees, confusing practices that constantly change and impossible barriers to getting help — even for problems caused by the card companies.
The glare of the Congressional spotlight has spurred many major card companies to publicly abandon unfair practices such as double-cycle billing and universal default. And, in the first update of the open-ended credit rules in 25 years, the Federal Reserve came out with proposed new disclosure regulations that incorporate important new consumer protections.
While I welcome these improvements, I worry that card companies will go back to the most profitable modes of doing business as competitive pressure grows. I’m also concerned that even the best disclosures cannot protect consumers from some abuses, particularly when regulators don’t enforce them.
I believe that stronger consumer protections for credit card holders that bear the force of law are still needed, which is why I plan to introduce credit card reform legislation this fall. My bill will be based on several common-sense principles that card companies could choose to voluntarily undertake right now.
Simply put, I believe that credit card companies should:
• evaluate the ability of potential customers to handle credit before issuing them a card, and only provide customers with terms and credit limits appropriate to their financial situation;
• clearly explain the features, terms and pricing of a new account before a card is accepted, and ban confusing or misleading billing practices like universal default and double-cycle billing;
• provide their customers with a timely and easy-to-understand notice if they plan to change the terms or rates of their account, as well as a way to opt out of any change; and
• encourage responsible credit use and provide special support to students, customers with special needs and other at-risk populations.
As a New Yorker, I know better than anyone that the credit card industry helps fuel our economy by creating jobs, financing businesses and making daily life easier for millions of people. But that doesn’t excuse card companies from treating their customers with the fairness and respect they deserve.
Rep. Carolyn Maloney (D-N.Y.) is chairwoman of the Financial Services Subcommittee on Financial Institutions and Consumer Credit.