Support Unfair Credit Card Practices Legislation sign now

Credit Card companies have been taking advantage of those people who have always paid their accounts on-time and it is time to put a stop to Unfair Credit Card Practices!!

Please sign this petition in support of US Senate Bill H.R. 5280, which was prepared by Senator Carl Levin of Michigan, whose testimony reads as follows:

Chairwoman Maloney, Ranking Member Biggert, and Members of the Subcommittee, I thank you for the opportunity to testify today and add to your legislative record a description of some of the work on unfair credit card practices that has been conducted in the other body, by the Senate Permanent Subcommittee on Investigations, which I chair. I would also like to commend this Subcommittee and the full Financial Services Committee for the important work you have been doing to expose credit card abuses. The Maloney-Frank bill you are considering today, H.R. 5244, includes valuable provisions which would alleviate many of the credit card abuses hurting American families. Its impressive that the bill already has 95 cosponsors.

I also commend my colleague Senator Wyden for his work on this topic.

Credit card companies have gone too far when they hike the interest rates of cardholders who pay on time and comply with their credit card agreements, impose interest rates as high as 32\%, charge interest for debt that was paid on time, apply higher interest rates retroactively to existing credit card debt, pile on excessive fees, charge interest on those fees, apply consumer payments first to the debt with the least expensive interest rate, and engage in other outrageous practices that are burying American consumers in a mountain of debt. Working families are already under pressure from skyrocketing gasoline and food costs, the mortgage crisis, and mounting debt; now more than ever, credit card abuses are compounding their misery.

Because these unfair practices have gone on for so many years and often represent the industry norm, it is unlikely industry will give them up unless credit card reform legislation creates a new level playing field that applies equally to all credit card issuers. Otherwise, I am afraid that these practices are too entrenched, too profitable, and too immune to consumer pressure for the companies to change them on their own. Legislation is critical not only to protect consumers but also to ensure that credit card companies willing to do the right thing are not put at a competitive disadvantage by companies continuing unfair practices.

Some argue that Congress doesnt need to ban unfair credit card practices; they contend that improved disclosure alone will empower consumers to seek out better deals. Sunlight can be a powerful disinfectant, but credit cards have become such complex financial products that even improved disclosure will frequently not be enough to curb the abuses -- first because some practices are so confusing that consumers cant easily understand them, and second because better disclosure does not always lead to greater market competition, especially when virtually an entire industry is using and benefiting from practices that hurt consumers.

PSI Credit Card Investigation

Before I discuss the credit card investigation conducted by the Senate Permanent Subcommittee on Investigations or PSI Id like to briefly explain a bit about PSI. PSI is a unique subcommittee charged with conducting bipartisan investigations into a specified range of issues. The Subcommittee traditionally takes the time to delve deeply into a subject and conducts hearings using detailed case histories to illustrate the issues being examined. The Subcommittee has no legislative jurisdiction, and so takes pride in sharing its work with the committees of legislative jurisdiction to add to their legislative records. It is also common for Subcommittee Members to introduce legislation addressing the problems examined in a PSI investigation. That legislation is then referred to the committees of legislative jurisdiction for their further consideration.

Our work on credit cards started in 2005, when I requested a U.S. Government Accountability Office (GAO) report to compile a description of the fees, interest rates and disclosure practices of popular credit cards from the largest credit card issuers. Following the release of that GAO report in 2006, we began to investigate some of the highlighted practices. The Subcommittee staff met with each of the major card issuers, visited a credit card bill processing facility, spoke with credit card regulators, and took other steps to be sure we fully understood the industrys practices and standards. The staff also met with consumer groups, businesses, and experts familiar with credit card practices. The Subcommittee also poured through numerous case histories of individuals describing abusive practices that had mired them and their families in debt.

PSI held two hearings examining a range of unfair credit card practices. The first hearing, in March 2007, examined practices involving fees, interest rates and grace periods at the major credit card companies. A second hearing in December 2007 looked at how even cardholders who play by the rules, pay their bills on time, and stay under their credit limits, have had their interest rates hiked, sometimes to the extent that their interest rates were doubled or even tripled. Together, these hearings provide a detailed legislative record documenting a host of unfair credit card practices and the need for legislative reform.

Id like to describe here some of the case histories that the Subcommittee examined at its hearings.

Excessive Fees

The first case history we examined illustrates the fact that major credit card issuers today impose a host of fees on their cardholders, including late fees and over-the-limit fees that are not only substantial in themselves but can contribute to years of debt for families unable to immediately pay them.

Wesley Wannemacher of Lima, Ohio, testified at our March 2007 hearing. In 2001 and 2002, Mr. Wannemacher used a new credit card to pay for expenses mostly related to his wedding. He charged a total of about $3,200, which exceeded the cards credit limit by $200. He spent the next six years trying to pay off the debt, averaging payments of about $1,000 per year. As of February 2007, hed paid about $6,300 on his $3,200 debt, but his billing statement showed he still owed $4,400.

How is it possible that a man pays $6,300 on a $3,200 credit card debt, but still owes $4,400? Heres how. Take a look at Exhibit 1. On top of the $3,200 debt, Mr. Wannemacher was charged by the credit card issuer about $4,900 in interest, $1,100 in late fees, and $1,500 in over-the-limit fees. He was hit 47 times with over-limit fees, even though he went over the limit only 3 times and exceeded the limit by only $200. Altogether, these fees and the interest charges added up to $7,500, which, on top of the original $3,200 credit card debt, produced total charges to him of $10,700.

In other words, the interest charges and fees more than tripled the original $3,200 credit card debt, despite payments by the cardholder averaging $1,000 per year. Unfair? Clearly, I think, but our investigation has shown that sky-high interest charges and fees are not uncommon in the credit card industry. While the Wannemacher account happened to be at Chase, penalty interest rates and fees are also employed by other major credit card issuers.

The week before the March hearing, Chase decided to forgive the remaining debt on the Wannemacher account, and while that was great news for the Wannemacher family, that decision doesnt begin to resolve the problem of excessive credit card fees and sky-high interest rates that trap too many hard-working families in a downward spiral of debt.

These high fees are made worse by the industry-wide practice of including all fees in a consumers outstanding balance so that they incur interest charges. It is one thing for a bank to charge interest on funds lent to a consumer; charging interest on penalty fees goes too far.

Charging Interest for Debt Paid on Time

Another galling practice featured in our March hearing involves the fact that credit card debt that is paid on time routinely accrues interest charges, and credit card bills that are paid on time and in full are routinely inflated with what I call trailing interest. Every single issuer contacted by the Subcommittee engaged in both of these unfair practices which squeeze additional interest charges from responsible cardholders.

Heres how it works. Take a look at Exhibit 2. Suppose a consumer who usually pays his account in full, and owes no money on December 1st, makes a lot of purchases in December, and gets a January 1 credit card bill for $5,020. That bill is due January 15. Suppose the consumer pays that bill on time, but pays $5,000 instead of the full amount owed. What do you think the consumer owes on the next bill?

If you thought the bill would be the $20 past due plus interest on the $20, you would be wrong. In fact, under industry practice today, the bill would likely be twice as much. Thats because the consumer would have to pay interest, not just on the $20 that wasnt paid on time, but also on the $5,000 that was paid on time. In other words, the consumer would have to pay interest on the entire $5,020 from the first day of the new billing month, January 1, until the day the bill was paid on January 15, compounded daily. So much for a grace period. In addition, the consumer would have to pay the $20 past due, plus interest on the $20 from January 15 to January 31, again compounded daily. In our example, using an interest rate of 17.99\% (which is the interest rate charged to Mr. Wannamacher), the $20 debt would, in one month, rack up $35 in interest charges and balloon into a debt of $55.21.

You might ask hold on why does the consumer have to pay any interest at all on the $5,000 that was paid on time? Why does anyone have to pay interest on the portion of a debt that was paid by the date specified in the bill in other words, on time? The answer is, because thats how the credit card industry has operated for years, and they have gotten away with it.

Theres more. You might think that once the consumer gets gouged in February, paying $55.21 on a $20 debt, and pays that bill on time and in full, without making any new purchases, that would be the end of it. But you would be wrong again. Its not over. Look again at Exhibit 2. Even though, on February 15, the consumer paid the February bill in full and on time all $55.21 the next bill has an additional interest charge on it, for what we call trailing interest. In this case, the trailing interest is the interest that accumulated on the $55.21 from February 1 to 15, which is time period from the day when the bill was sent to the day when it was paid. The total is 38 cents. While some issuers will waive trailing interest if the next months bill is less than $1, if a consumer makes a new purchase, a common industry practice is to fold the 38 cents into the end-of-month bill reflecting the new purchase.

Now 38 cents isnt much in the big scheme of things. That may be why many consumers dont notice these types of extra interest charges or try to fight them. Even if someone had questions about the amount of interest on a bill, most consumers would be hard pressed to understand how the amount was calculated, much less whether it was incorrect. But by nickel and diming tens of millions of consumer accounts, credit card issuers reap large profits.

I think it is indefensible to make consumers pay interest on debt which they pay on time. It is also just plain wrong to charge trailing interest when a bill is paid on time and in full.

Unfair Interest Rate Hikes

My Subcommittees second hearing focused on another set of unfair credit card practices involving unfair interest rate increases. Cardholders who had years-long records of paying their credit card bills on time, staying below their credit limits, and paying at least the minimum amount due, were nevertheless socked with substantial interest rate increases. Some saw their credit card interest rates double or even triple. At the hearing, three consumers described this experience.

Janet Hard of Freeland, Michigan, had her Discover credit card interest rate increased from 18\% to 24\% in 2006, even though she had made payments to Discover on time and paid at least the minimum amount due for over two years. Discover applied the 24\% rate retroactively to her existing credit card debt of $8,300, increasing her minimum payments and increasing the amount that went to finance charges instead of the principal debt. The result, as shown on Exhibit 3, was that, despite making steady payments totaling $2,400 in twelve months and keeping her purchases to less than $100 during that same year, skyhigh interest charges ate up most of her payments and Ms. Hards credit card debt went down by only $350.

Millard Glasshof of Milwaukee, Wisconsin, a retired senior citizen on a fixed income, incurred a debt of about $5,000 on his Chase credit card, closed the account, and faithfully paid down his debt with a regular monthly payment of $119 for years. In December 2006, Chase increased his interest rate from 15\% to 17\%, and in February 2007, hiked it again to 27\%. Retroactive application of the 27\% rate to Mr. Glasshofs existing debt meant that, out of his $119 payment, about $114 went to pay finance charges and only $5 went to reducing his principal debt. As shown in Exhibit 4, despite his making payments totaling $1,300 over twelve months, Mr. Glasshof found that, due to high interest rates and excessive fees, his credit card debt did not go down at all. Later, after the Subcommittee asked about his account, Chase suddenly lowered the interest rate to 6\%. That meant, over a one year period, Chase had applied four different interest rates to his closed credit card account: 15\%, 17\%, 27\%, and 6\%, which shows how arbitrary those rates are.

Then there is Bonnie Rushing of Naples, Florida. For years, she had paid her Bank of America credit card on time, providing at least the minimum amount specified on her bills. Despite her record of on-time payments, in 2007, Bank of America nearly tripled her interest rate from 8 to 23\%. The Bank said that it took this sudden action, because Ms. Rushings FICO credit score had dropped. When we looked into why it had dropped, it was apparently because she had opened Macys and J.Jill credit cards to get discounts on purchases. Despite paying both bills on time, the automated FICO system had lowered her credit rating, and Bank of America had followed suit by raising her interest rate by a factor of three. Ms. Rushing closed her account and complained to the Florida Attorney General, my Subcommittee, and her card sponsor, the American Automobile Association. Bank of America eventually restored the 8\% rate on her closed account.

In addition to these three consumers who testified at the hearing, the Subcommittee presented case histories for five other consumers who experienced substantial interest rate increases despite complying with their credit card agreements. The facts of these cases, as well as details related to the Hard, Glasshof and Rushing case histories, are set forth in Exhibit 5.

Id also like to note that, in each of these cases, the credit card issuer told our Subcommittee that the cardholder had been given a chance to opt out of the increased interest rate by closing their account and paying off their debt at the prior rate. But each of these cardholders denied receiving an opt-out notice, and when several tried to close their account and pay their debt at the prior rate, they were told they had missed the opt-out deadline and had no choice but to pay the higher rate. Our Subcommittee examined copies of the opt-out notices and found that some were filled with legal jargon, were hard to understand, and contained procedures that were hard to follow. One example, a full four pages long, is shown in Exhibit 6. When we asked the major credit card issuers what percentage of persons offered an opt-out actually took it, they told the Subcommittee that 90\% did not opt out of the higher interest rate a percentage that is contrary to all logic and strong evidence that current opt-out procedures dont work.

The case histories presented at our hearings illustrate only a small portion of the abusive credit card practices going on today. Since early 2007, the Subcommittee has received letters and emails from thousands of credit card cardholders describing unfair credit card practices and asking for help to stop them, more complaints than I have received in any investigation Ive conducted in more than 25 years in Congress. The complaints stretch across all income levels, all ages, and all areas of the country.

The Need for Legislation

In 2006, Americans used 700 million credit cards to buy $1.8 trillion in goods and services. The average family now has 5 credit cards. Credit cards are being used to pay for groceries, mortgage payments, even taxes. And they are saddling U.S. consumers, from college students to seniors, with a mountain of debt. The latest figures show that U.S. credit card debt is now approaching $1 trillion. These consumers are routinely being subjected to unfair practices that squeeze them for ever more money, sinking them further into debt. Its long past time to enact legislation to protect them.

Thats why I introduced the Stop Unfair Practices in Credit Cards Act, S. 1395, a summary of which is contained in Exhibit 7. Senator Claire McCaskill joined me in that introduction, and so far the bill has ten cosponsors. It has also been introduced in the House as H.R. 5280 by Representative Lincoln Davis, a member of this Subcommittee. Our bill has also been strongly endorsed by consumer groups, labor unions, and the National Small Business Association. In the Senate, it has been referred to the Senate Banking Committee, which is chaired by Senator Chris Dodd, a longtime champion of credit card issues. Senator Dodd has introduced credit card legislation in the past and is working on the issue again this Congress.

There is significant overlap between my bill and the Maloney-Frank bill being considered today, including provisions which would:

prohibit the charging of interest on debt that is paid on time;
prohibit the charging of so-called trailing interest -- that is, interest charged between the time that a bill is sent out requesting payment and the date on which the bill is paid; and
prohibit interest rate increases on cardholders who pay their bills on time, a practice that is sometimes referred to as universal default.

There are also some provisions in the Maloney-Frank bill that are not in my bill, but which are important and should be enacted into law, including the following:

provisions to end the credit card billing games that go on today, by requiring bills to be sent out at least 25 days before payment is due, requiring the acceptance of payments up until 5:00 p.m. on the due date, and creating a presumption that payments mailed 7 days before a due date are on time;
provisions requiring a 45-day notice period before a higher interest rate can take effect; and
provisions to limit the ability of subprime credit cards to surprise consumers with high fees.

There are also some unfair practices addressed in my bill that are not addressed in the Maloney-Frank bill, and that I encourage this Subcommittee to consider adding to its legislation.

No Interest on Fees. The Levin-McCaskill bill would stop credit card issuers from charging interest on their fees. Its one thing for a credit card issuer to collect interest on money that was lent to the cardholder at his or her request, but it is totally different to assess interest on penalty and transaction fees that the credit card issuer has imposed on cardholders and is requiring them to pay out of pocket.

No Retroactive Interest Rates. The Levin-McCaskill bill would also prohibit credit card issuers from hiking an interest rate and then applying it to pre-existing credit card debt. No other type of consumer lending allows the lender to re-write the terms of an earlier lending agreement, especially by increasing a previously agreed-to interest rate on an existing debt. Credit card companies should not be allowed to engage in this practice either.

Seven Percentage Point Cap on Penalty Interest Rates. The Levin-McCaskill bill would also put a cap on how much an interest rate can be increased if a cardholder misses a payment or exceeds a credit limit. Under the bill, penalty interest rates could not increase more than seven percentage points over the prior rate. I believe seven percentage points is a more than a fair increase. The concept of an interest rate cap is taken from the practice now followed in some adjustable rate mortgages that place a ceiling on how much the interest rate can increase. A seven percentage point cap would allow issuers to impose a substantial penalty, while protecting cardholders from outrageous increases for what are often minor infractions.

Applying Consumer Payments. Another provision involves consumer payments. Right now, all credit card issuers apply consumer payments first to the debt with the least expensive interest rate. The Levin-McCaskill bill would flip that practice, and require payments to be applied first to the debts with the most expensive interest rates. The Maloney-Frank bill would split the difference by requiring a pro rata allocation of payments to balances with different interest rates. While that approach is an improvement over the status quo, it is more complicated than our approach and less favorable to consumers who are often saddled with debts carrying extremely high interest rates of 20, 25 and even 32\% and ought to be allowed to pay those debts off first.

No Pay-to-Pay Fees. Still another provision in the Levin-McCaskill bill would stop credit card issuers from charging cardholders a fee to pay their bills, such as a fee to pay a bill by the Internet or telephone. Charging folks a fee to pay their bills on time is a travesty, it provides an unjustified windfall to credit card companies, and it shouldnt be allowed. I hope this Subcommittee will see fit to ban that practice in your bill.

Credit card issuers like to say that they are engaged in a risky business, lending unsecured debt to millions of consumers, but it is clear that they have learned to price credit card products in ways that produce enormous profit. For the last decade, credit card issuers have reported year after year of solid profits, maintained their position as the most profitable sector in the consumer lending field, and reported consistently higher rates of return than commercial banks. Credit card issuers make such a hefty profit that they sent out 5 billion pieces of mail last year soliciting people to sign up. With profits like those, credit card issuers can afford to give up abusive practices that treat consumers unfairly.

In closing, while the remaining legislative days in this Congress are dwindling, there is still time to enact tough credit card reform legislation. U.S. families have incurred credit card debt that now reaches a total of nearly $1 trillion. Too many of these families are being hurt by too many unfair credit card practices to delay action any longer. Credit card companies are piling on excessive fees, charging interest on debt that is paid on time, hiking interest rates even for consumers who faithfully pay their bills every month, applying higher rates retroactively to pre-existing credit card debt, and engaging in other unfair practices that attempt to squeeze more money out of even the most responsible cardholders. I commend this Subcommittee for tackling credit card reform and taking the steps needed to ban unfair practices that are causing so much pain and financial damage to American families today.

I ask unanimous consent to include in the hearing record the seven exhibits referred to in my statement.

Together we can show the US Senate and US Congress that we do not want to wait any longer for their petty party politics to work themselves out and pass this bill that will help hundreds of thousands of people get their selves out of debt!

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Norma BradyBy:
Nature and EnvironmentIn:
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