Credit card nightmares prompt long-awaited crackdown

WASHINGTON — What prompted a slew of new federal proposals to combat abusive practices in the credit card industry depends on whom you talk to in Washington.

Some say the new recommendations by the Federal Reserve Board were the result of congressional pressure and public outcry.

Others say that regulators, stung by their own inaction in the subprime mortgage meltdown, feared a similar mistake would cause the growing credit crisis to snowball.

While there's disagreement about what sparked the move, even the most jaded political observers now agree that, after years of complaints, relief is finally on the way for cardholders who feel victimized by their plastic.

"I've not seen anything like this out of the Federal Reserve ever," said Travis Plunkett, the legislative director of the Consumer Federation of America. "These problems have been coming up for a decade, and they've been asleep at the switch. But that's changing. It's a new world."

And not a moment too soon for such folks as Kathi Parlier of Newnan, Ga., whose credit card interest rate jumped from about 7 percent to 32 percent in 2004 after a property foreclosure damaged her credit rating. Parlier, 42, said she'd never made a late payment on the card.

"I could deal with it going to 12 to 15 percent, but considering I was never late, they never should have gone up on it like that," Parlier said. "They shouldn't be able to do that."

New rules proposed by the Fed wouldn't stop rate increases like Parlier's, which are known as "universal defaults." But they would prohibit card companies from applying the higher rate to the existing card balance — unless the cardholder was more than 30 days late on his or her bill.

That provision alone would have saved Parlier thousands of dollars. Her card balance was nearly $7,000 when the rate hike kicked in. The higher interest rate — now about 29 percent — means only a small portion of her payments go toward her debt.

"I paid $160 last month and $108 of that was finance charges, so I've only got $52 going to principal," Parlier said. "I always pay a little more than the minimum, otherwise I would never get it paid off."

The Fed's new recommendations were drafted in concert with the Office of Thrift Supervision and the National Credit Union Administration.

The recommendations call for credit card companies to stop imposing interest charges using the "two-cycle" billing method, which calculates interest for a single billing cycle based on the average balance of the last two billing cycles. Another proposal requires card payments received by 5 p.m. on the due date to be considered on time.

Other proposals would limit fees that reduce available credit on subprime credit cards and require credit solicitations to disclose the factors used to determine an applicant's interest rate and credit limits. Related proposals by the Fed would require banks to give customers notice and the opportunity to opt out of transactions involving account overdrafts before punitive fees and charges are imposed.

In the public comments that have begun pouring into the Federal Reserve, consumers are unanimous in their support for the recommendations and for Fed Chairman Ben Bernanke's leadership on the issue.

"I urge you to rein in the banks and credit card companies. The table has tilted their way entirely too long and needs to be tipped back in favor of the consumers. Thank you for finally moving on this matter," wrote Vernon Sandusky of Vacaville, Calif.

Monte L. Burnworth of West Liberty, Ohio, said his experience with a universal default rate hike was traumatizing. "It made me so stressed out that I had to borrow against our house to pay the LEACHES off. ...If I had my way I would make them pay all the interest back plus 30 percent interest and see how they slept at night."

Ann Downey of Laguna Hills, Calif., was equally upset: "It seems that the last seven or so years that banks and credit card companies have had their way, like the floodgates opened and the consumers' rights got washed away in the flood."

Alicia Borgman of Columbus, Ohio, wrote: "Creditors should not have the right to change the contract agreed upon by them and the consumer at any time, without any oversight or approval, as they currently do. If a contract is a legally binding agreement, both parties should be held to it, not just the consumer."

The value of a robust public response shouldn't be underestimated.

During a congressional hearing in April, Sandra F. Braunstein, director of the Federal Reserve's Division of Consumer and Community Affairs, testified that the strong comments from the public on improving credit card statements and disclosures were "startling."

"We had over 2,000 letters on the credit card proposal from individuals that were truly personal and individually written about people's personal experience with their cards," Braunstein told lawmakers. "We've never had that on any rulemaking before. So I have to tell you, that resonated with us."

The banking and credit card lobby have criticized the proposals as an unwarranted intrusion into industry practices. Other industry groups say the proposals hurt card issuers' ability to set interest rates based on a customer's risk.

Consumer advocates expect the industry's lobbying effort against the measures and related legislative proposals in Congress to reach fever pitch in the coming months.

"I just hope things don't get watered down with lobbyist money," wrote Anthony Shelton of Gary, Ind. "Someone should have the guts to stand up for the American people."

An overview of the Federal Reserve Board's proposals to address unfair and deceptive credit card practices and the place to submit public comment about the measures: