Overview

Credit card companies use a variety of unfair practices to trap consumers in a cycle of over-priced debt. The companies are allowed by law and by regulators to raise your rates for any reason, including no reason. They are allowed to operate nationally out of states, like Delaware and South Dakota, with weak consumer laws and no limits on interest rates or fees. No matter where you live, even in a state with strong laws, the weak, pro-industry laws of those states govern your contract.

Consumers should either pay balances in full, or make the largest payments they can afford, and always pay early in the cycle to avoid late fees and, worse, having their rates jacked to penalty levels only a loan shark would love—36% APR or more.

For years, credit card companies were the most profitable form of banking, according to the Federal Reserve. But to ratchet up profits even more, they have recently numerous “trick, trap and gotcha” practices.

First, they started tricking consumers by advancing long-standing regular due dates all of a sudden by as much as 5 days or more to trick consumers into paying late. They put due dates on weekends and claimed that bills received after 12 noon or 1pm were late. They started imposing late fees not when bills were 30 days late, but as little as one minute or one day late. The regulators allowed this. Then, even after raising late fees to $39 or more, they claimed that being late also allowed them to jack interest rates by three times or more to 36% APR or even more.

Then, they started claiming that even if your payment history to them was perfect, they could jack your interest rate if your credit score declined (which could happen due to identity theft or numerous innocent reasons) or if you were late to some other creditor. They called this universal default.

Then, as the third strike against consumers, they invoked the extremely unfair “change the rules for any reason, including no reason” clause and started raising interest rates for no reason at all. This outraged Americans who started complaining to the Federal Reserve. Over 60,000 consumers complained. The normally somnolent agency woke up. It agreed with Maloney and Dodd that these and certain other practices were unfair. They proposed and on December 18, 2008 finalized rules that make the practices illegal. In the past, the Fed had relied solely on disclosure to “protect” consumers. This was a major step.

But the Fed gave the banks until July 2010 to comply with the rules. So, it was important that Congress stepped in and passed an even stronger law that takes effect more quickly. Further, the new law will be more permanent than a rule from the regulators.

The credit card companies also spent millions on lobbying and campaign donations to get Congress to pass 2005 bankruptcy amendments that make it harder and more expensive to file for bankruptcy, so aggrieved consumers spend years paying over-priced credit card interest instead and never get a fresh start.

For years the firms also lowered minimum monthly payments and encouraged the use of cards for everyday expenses—through rewards programs—so that many consumers accumulated massive amounts of credit card debt. Until recently, a consumer who owed credit card debt of $5,000 at a common 16 percent APR, who only made the typical 2 percent minimum payment, would take 26 years to pay off the card, even if it was cut up and never used again.

Although the ability of states to regulate the fees and interest rates (APRs) of credit card companies has been severely restricted by federal preemption doctrine, which has allowed the weak laws of Delaware and South Dakota to override the state laws where credit card customers live, states are taking action in one area. In response to the growing problem of aggressive credit card marketing to young people on college campuses, some states, such as California, have restricted campus credit card marketing. Several colleges and universities have taken similar actions at the local level. See the U.S. PIRG reports, "Graduating Into Debt: Credit card marketing on college campuses," and “The Campus Credit Card Trap” and “Characteristics of Fair Campus Credit Cards” at truthaboutcredit.org for more information.
 
Highlights of the new law:

As of August 20, 2009:

Requires 45-day notice of adverse changes in terms. Requires banks to mail statements at least 21 days in advance of due dates. Requires notice of right to cancel when new terms unacceptable.

As of February 20, 2010:

Bans hair trigger rate increases for late payments: No increased interest rates generally allowed on existing balances for any late payment, unless customer 60 days late. Prohibits late fees for bills due on Sunday or holiday that arrive the next day or that arrive at any time before 5pm on any due date local time.

Bans any universal default (raising rates due to late payment to other creditor) in the first year of any card contract, for both existing and future balances. Bans universal default permanently on existing balances.

Requires payments to accounts with balances at multiple interest rates to be allocated more favorably to the higher interest rate balances (current practices is to apply full payment to lowest rate). Bans certain practices designed to collect interest on amounts already paid in previous months.

Gives FTC greater authority over deceptive marketing of “free-to-pay” offers for products such as credit monitoring, e.g., freecreditreport.com.

Protects young people from unfair marketing of credit cards by requiring any consumer between 18-21 to show an ability to repay or have a co-signer. Bans free gift inducements in any marketing on college campuses.

Provides new protections for purchasers of pre-paid gift cards.