Credit Card Laws and Court Rulings--Have They Helped Consumers?

Congress passed the Credit CARD Act in May but it gave issuers and banks almost one year to implement the major provisions of the bill. Since then, issuers did exactly what they threatened to do--raise rates and fees on a broad group of cardholders. Consumers and elected officials are not happy about this, and members of Congress plan to introduce a bill to accelerate the effective date of the bill from February 22, 2010 to December 1, 2009.

The CARD Act is not the first governmental attempt to make changes to the credit card industry. United States lawmakers and judges have had mixed success in using laws, regulations, and court rulings to change the industry and protect consumers. Have these been helpful, or have they caused more harm than good?

Here are some of the governmental laws, regulations and court cases that have shaped the credit card terms that we have today.

* Truth in Lending Act (1968)
Requires uniform method for calculating the cost of credit and publicizing credit terms, including the APR, so consumers can compare credit offers. The advertised terms must actually be available. It bans the unrequested issuance of credit cards, restricts cardholder liability for unauthorized use, requires fair and timely resolution of credit card billing disputes, and puts a $50 limit on cardholder liability for unauthorized charges. (Prior to this ruling, credit card issuer mailed active credit cards out in mass mailing. This created problems with identity theft and fraud for consumers.)


* Fair Credit Reporting Act (1970)
Protects consumers against incorrect or misleading information in credit files maintained by credit-reporting agencies. Credit bureaus must investigate disputed charges and correct the incorrect charges. If the disputed charge cannot be resolved, the consumer can request the inclusion of their side of the story. Amended in 1996 to regulate collection, dissemination and use of consumer information.


* Fair Credit Billing Act (1974)
Gives cardholders the power to fight improper credit card charges. Mandates how creditors are to respond to billing errors. Accounts must be handled promptly and fairly.


* Equal Credit Opportunity Act (1974)
Prohibits discrimination in credit transactions. Requires creditors to grant credit to qualified individuals without a co-signature by the spouse. Credit histories on jointly held accounts must be maintained in the names of both spouses. Requires that issuers must provide in writing the reasons that credit was denied. Credit card applicants must be notified within thirty days if the loan has been approved or not. If the application is not approved, the issuer must give the applicant reasons for the decision in writing.


* Fair Credit and Charge Card Disclosure Act of 1988 Requires that applications that are solicited by phone, sent through the mail or any other way made available to the public contain the key terms of the contract. These must include information about rates, fees, grace periods, etc.


* Fair and Accurate Credit Transaction Act of 2003
Created to address the growing problems with identity theft. Credit and debit card receipts may not include more than the last five digits of the card nor the expiration date. Gives consumers the right to get a free credit report each year from the big three reporting agencies. Increases the accuracy of credit reports and established national standards in regulations of credit reports.


* Credit CARD Act of 2009
Provides better protections to consumers by prohibiting some unfair practices used by credit card issuers. Also improves disclosures that cardholders receive. Protects against unexpected interest changes and unfair payment allocations, forbids two-cycle billing, mandates that cardholders must receive a reasonable amount of time to make payments, and limits the fees of sub-prime cards.


Significant Court Rulings

Before 1978, 37 states had usury laws that capped rates and fees on credit cards. At that time, the rate for most cards was about 18%. Two court cases invalidated these usury laws and opened the door to the high rates and fees that we have today. These ruling have given issuers the freedom to charge default rates that can be over 30%, $39 late fees and 5% balance transfer fees.

* Marquette National Bank vs. First of Omaha Service Corp in 1978
Marquette held that national banks could charge credit card customers the highest interest rate allowed in the bank's home state, instead of the customer's home state. As a result, major banks moved to states such as South Dakota and Delaware because these states had no usury ceilings on interest rates and they could export these rates to the other states.

* Smiley vs. Citibank in 1996
In 1996, the Supreme Court ruled that credit card companies could lift the cap on fees which, like interest rates, used to be regulated at the state level. Late fees were $16-$20 before Smiley. Now, they are as high as $39.

Despite CARD Act, Credit Card Rates and Fees Continue to Increase

The major provisions of the Credit CARD Act do not go into effect until February of 2010. Meanwhile, cardholders have been encountering some of the negative consequences resulting from the bill while waiting for the benefits. Even after the bill goes into effect in five months, the benefits for cardholders may be outweighed by an acceleration of interest rate hikes and increases in fees that have already taken place. Despite complaints from consumers, these rate and fee increases are helping issuers get financially healthy once again.

"This acceleration is made possible through loopholes that still allow areas of unhampered rate and fee increases. Right now, it seems that some cardholders may have been better off without the bill," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Since January, LowCards.com has tracked the changes made by eight credit card issuers and has recorded over 50 changes in interest rates, fees, rewards or terms. Issuers will continue to try to increase their revenue in these ways because the CARD Act doesn't go into effect for five months, and once it does, it provides little regulation on rewards and fees."

Raising balance transfer fees is a current trend among issuers. For several years, a 3% balance transfer fee was the industry standard. In June, Bank of America shook the status quo and raised the fee to 4%. Chase raised their balance transfer fee to 5% in August and Discover announced this week that they will follow with a 5% fee.

"This year, many consumers have received a large rate increase or a minimum payment increase, adding to their financial difficulties. Negotiating a lower rate is usually not possible, so transferring the balance to a card with a lower rate is a popular option for cardholders carrying a balance. A 5% balance transfer fee adds strain to cardholders who are desperate to find a card with a lower rate," says Hardekopf. "To make matters worse, interest is charged on the balance transfer fee because it is rolled into the amount transferred. If you transfer $5,000, your fee will be $250 plus interest."

Even after the CARD Act is in full effect, issuers are expected to continue with rate and fee increases and aggressive changes because they benefit the issuer. For example, Discover's net income rose to $577.5 M in the third quarter, up from
$180.M in the same period last year. Discover has tripled its net income by, among other things, increasing interest rates on some cards, adding a 2% foreign transaction fee (May 2009), and shifting some fixed rate cards to variable rate cards. The increase in balance transfer fees from 3% to 5% and an increase in the cash advance fee from 3% with a $5 minimum to 5% with a $10 minimum in
January 2010 will add to their revenue base.

Discover is certainly not the only issuer making significant changes as consumers await the implementation of the Credit CARD Act. Here are some changes made by other issuers showing examples of how issuers are increasing their revenues:

* APR changes. Examples: in October, Bank of America offers the BankAmericard Basic Visa Card. It is advertised as a simpler card with one-page of terms and conditions. The APR will be 14% plus prime which would currently make the APR 17.25%. In May, Capital One increased the cash advance APR from 22.9% to 24.9%.

* Reward changes. Example: American Express reduced the amount of cash you can earn on some of their cards to 1.25% on most purchases, down from 1.5%.

* Minimum payment changes. Example: in January, Chase increased the minimum payment from 2% of your balance to 5% on a number of their accounts.

* New fees. Example: Citi began charging a 3% fee for all transactions made outside the United States in US dollars. Previously, the fee was not added when foreign transactions were made in US dollars. (Feb. 2009)

* Annual fees. Example: in August notifications, Citi began informing some of its cardholders that they will be charged an annual fee of $30 to $90 unless they spend at least $2,400 per year.

Consumers May Suffer from Increasing Credit Card Default Rates

While some Washington politicians claim the economy is recovering nicely, credit card default rates indicate consumers are still facing very significant struggles.

The default rates reported by some of the country's major credit card issuers were up again in August. Two issuers, Bank of America and Citigroup, showed their highest default rates since the onset of this current economic crisis.

Here are the August delinquency rates compared to the July figures by issuer:

* Bank of America delinquencies increased to 14.54% from 13.21%

* Citigroup delinquencies increased to 12.14% from 10.03%

* Discover delinquencies increased to 9.16% from 8.43%.

* American Express delinquencies decreased to 8.5% from 8.9%

* Capital One delinquencies decreased to 9.32% from 9.83%

These default rates indicate issuers are still under financial stress and that cardholders might expect the rate and fee increases as well as the tightened credit market to continue.

"These high default rates are very concerning. The July default rates took a slight decrease which gave everyone some hope that the worst may be over, and that is what makes these August numbers so disappointing," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "These issuers can't just lose this money, shrug it off and operate as usual. They have to find a way to increase their income and that will mean continued changes to their cardholders. That probably means some additional increases in the rates and fees, as well as some reductions in their reward programs."

This week, Bank of America announced its new BankAmericard Basic Visa card that will be available in October and makes a few changes to the traditional credit card. It will be advertised as a simpler, straightforward card with one page of terms and conditions, and a flat fee of $39 for late payments. There will be no fee for going over the credit limit. It will have one fixed rate that will fluctuate with the prime rate. The rate will be prime plus 14%, so the current rate will be 17.25%. This rate is significantly higher than the current average APR of 12.09% reported from the LowCards Complete Credit Card Index.

"This is the 'plain vanilla' card that was suggested by President Obama. It is simpler, but there is a higher price to pay for it. Obviously this is only a good choice if the interest rate on your current card is over 17%," says Hardekopf.

By the beginning of November, the American Express Blue Card is increasing the standard APR for purchases to the prime rate plus 11.99%. At the August notification, this rate was 15.24%. This is a variable rate. (For cash advances, American Express will increase the APR to the prime rate plus 21.99%. At the August notification, this rate was 25.24%. This is a variable rate.)

Handling Credit Card Debt Should Your Spouse Pass Away

The death of a spouse is one of life's most difficult times. It becomes even more difficult if the surviving spouse is not fully prepared to handle the family's financial matters.

"It is human nature to avoid thinking about death and very few people like to talk about their financial matters. So it is not surprising that very few couples ever talk about how to handle their financial situation in the event of one spouse's death," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "However, you owe it to your spouse to make sure he or she is prepared should something ever happen to you. This applies to all financial matters, including credit card debt."

When is a surviving spouse not responsible for credit card debt?

If a credit card is only in your spouse's name, the debt only belongs to your spouse (there are exceptions to this in community property states). Family members will not be responsible for the debt or forced to pay it. Even if you are a second cardholder on the account who has charging privileges, but it is not a joint account, you are not responsible for the remaining debt.

If the card is only in your spouse's name, the estate is responsible for paying off the balance. The executor of the estate will use the assets to pay off the debts. If the estate doesn't have the money to pay the bill, then credit card companies must write it off and the account is closed.

There are several instances when the surviving spouse is responsible for the credit card debt.

If the card is a joint account, this means that your name is also listed on the account and the card is reported on your credit report. You will be responsible for the debt after your spouse dies.

In addition, if you live in a community property state, you could also be responsible for the debt. Assets that are gained together during marriage are classified as joint property in these states. This can also apply to debt. Debt gained together during marriage is considered joint debt and the surviving spouse is responsible. Rules vary by state. States that use common property laws include: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Sometimes
the surviving spouse will only have to pay the debts that he or she benefitted from like food, utilities and health care.

After your spouse dies, either you or the executor of the estate must notify all creditors that the account holder has died (even if the account was only in your spouse's name). Find out where to send a copy of the death certificate and include a note with the account number. Send it by certified mail so you have proof that it was sent. Keep a copy of the letter for your records.

If the estate of the deceased spouse has cash or assets, the executor will decide how these will be used to pay off debts before inheritance is distributed to heirs. You may have to pay a portion of the balance along with the estate. If there are no assets in the estate, you are responsible for paying off the debt.

Expect creditors or collection agencies to call. If there is money in the estate, they will go after it and may pressure you and attempt to bully you for payment. Refer all questions about payment to the executor. Don't answer questions about this until you know what assets you have, what you are responsible for, and what bills must be paid. If collection agencies or credit card companies start calling, make sure the debt is valid, that you are responsible for it, and it is not past the statute of limitations (3-6 years, varies by state and situation). If they are pursuing debts that aren't valid or that you shouldn't be responsible for, it may
be necessary to hire a lawyer to fight the actions of a credit card company or collections agency.

If you must assume payments for the debts, but don't have the money to pay, immediately contact the credit card companies to work out a payment plan. They may accept a portion of the payment to close the account. This is another issue where it may be helpful to have an attorney working for you. Seek legal advice from someone who specializes in estates, wills, and trusts.

"Life is unpredictable, but there are a few things you can do to protect yourself and your spouse. If you have credit card and other debts, pay them off as quickly as possible. Make sure that both partners know about all credit accounts, the amount owed and help create a payment plan for these," says Hardekopf. "It is also a good idea for each spouse to have a credit card in your own name so you each establish a strong credit record."

Can My Credit Card Company Do That to Me?

One of the most common complaints among credit cardholders is that changes have suddenly been made in the rates, fees or credit limits of an account. The customer usually reacts with the question, "Can they do that?" Despite the difficult personal hardships or the devastating effects these changes can cause on a household, the answer is almost always, "Yes, they can."

The ability for an issuer to make changes in your credit card account starts with the terms and conditions, the complicated fine print that is included in credit card offers that explains the rights of the issuer. Issuers can make changes to these terms at any time as long as they notify cardholders, usually with a mailed notice or an insert in the monthly bill. However, it is often easy for cardholders to miss important terms in the application or overlook the notifications, making it easy for customers to be caught by surprise by changes to their account.

"The terms and conditions of credit cards are tedious to read but they tell you almost everything that the issuer can do to your account," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "At the time you apply for a card, the basic information you see makes sense and sounds exciting. However, when you look closer at the fine print found in the terms and conditions, you can see how many changes can be made to your account and how hefty the fees may be for certain actions."

Here are some "Can they do that" questions and the answers:

* Can they change my fixed rate to a variable rate?
Yes. The issuer can switch the rate from a fixed rate to a variable rate even if the original offer said the rate was fixed for the life of the balance.

"Some issuers recently angered their cardholders by switching cards from fixed to variable rates. Some cardholders signed up for a card based on the fixed rate for the life of the balance," says Hardekopf. "They discovered that this was conditional. Issuers probably changed this because the Credit CARD Act requires that interest rates on new accounts must remain fixed for a year unless the cardholder does not pay the bill. Issuers don't want to be locked into that fixed rate, so they switched the cards from fixed to variable to give themselves more freedom in raising rates, even after the regulations go into effect."

* Can they change my rewards program?
Yes. Some issuers are changing the rewards structure for some cards to cut costs. American Express reduced the amount of cash you can earn from 1.5% to 1.25% on most purchases. Chase created Ultimate Rewards with a less generous rewards program to replace its popular Chase Freedom card. Capital One has notified some cardholders of a new points program that starts in November which has slightly lower rewards on a number of tiers.

* Can they close my account?
Yes. Issuers are closing accounts as a way to reduce their own lending risk. Unlike rate increases, issuers do not have to notify you before they close your account. Some issuers state in their terms and conditions that they will not be responsible for the consequences from closing your account.

"Some issuers are closing accounts due to inactivity. Right now, credit lines are very important, even if you aren't using them. They can be good for your credit score. To show account activity, use your card once a month on a small purchase and then pay off the balance completely at the end of each month," says Hardekopf.

* Can they increase my minimum payment?
Yes. Chase recently increased the minimum payment from 2% to 5% for many of its cardholders. In the long run, this is good for cardholders because the more they pay toward their balance, the faster they pay off the card and the less they pay in interest. However, this is bad timing and a financial blow for many households who are struggling to pay the bills right now. "If the increased minimum fee pushes you over the financial cliff, contact your issuer to work out a payment plan," says Hardekopf.

* Can they cut my credit limit?
Yes. A recent FICO study says that credit card issuers cut limits for an estimated 58 million cardholders for the twelve months ended in April 2009. Issuers can also increase or cancel your credit line, or the balance transfer or cash advance portion of your credit line.

* Can they increase fees any higher?
Yes. Issuers will probably continue finding ways to increase rates and fees. In June, Bank of America recently increased the balance transfer fee from 3% to 4%. Chase followed in August with an increase in the balance transfer fee to 5%.

* Can they increase my rate because I defaulted on another credit card with
another issuer?
No. This is Universal Default and it is banned under the Credit CARD Act. Issuers must only focus on your payment record with their particular card.

* Can they force me to accept a higher interest rate?
Not any more. The CARD Act now requires issuers to give a 45-day notice before a rate increase. This gives cardholders time to opt out, and close the account at the current rate. Keep in mind that this forfeits rewards and points so use those before you close the account.

* Can they force me to keep paying the higher rate as long as possible?
Yes, but only for a few more months. Currently, many issuers apply payments to the part of your balance with the lowest interest rates, forcing you to pay the highest rate as long as possible. After the CARD Act goes into effect, they will apply the payment toward that part of the balance with the highest rates.

* Can I do anything about significant changes to my account, especially the interest rate increases or decreases to my credit limit? Unfortunately, unless you have a great credit score, there is not a lot you can do. Several years ago, competition for cardholders was so active that a cardholder had to simply mention a competing offer to negotiate a lower rate. Today, issuers are much more selective and focused on minimizing their own risk. Only the cardholders with excellent credit scores still have power to get a better deal by threatening to switch to another credit card. Today, if your credit is not excellent, you may be stuck with the changes made to your account. Other issuers are no longer lining up with lower rates and generous terms for balance transfers just to get their card into your wallet or purse.

"There is tremendous frustration with consumers trying to work with credit card issuers to resolve problems with their account, even the problem is not their fault. Sometimes it can be very difficult to get help through customer service and there is no where else that consumers can turn for help," says Hardekopf. "The Obama Administration has proposed a Consumer Financial Protection Agency that will help address complaints of consumers and also enforce rules and laws for consumer protection. The credit card issuers are currently lobbying against this.

"Cardholders are angry about these changes and are getting very little relief from the issuers. Right now, issuers are focused on the bottom line, cleaning up their loans and saving their business. They are less sensitive to the concerns of their cardholders than they were a couple years go," says Hardekopf. "The only way to have control of your credit card is to pay off your balance every month. If you don't carry a balance, a change in the interest rate doesn't have much of an impact on you."

A History of Credit Cards

The credit card industry is undergoing a major transformation in 2009 as a result of the Credit CARD Act and significant policy changes by issuers. Credit card loans are much more expensive as issuers make changes to bring in the most revenue possible through interest rates and fees.

This is not a new development, but part of the evolution of credit cards. It is interesting to look back at the history of credit cards to understand the piece of plastic that has become the world-wide method of payment.

Until the 1950s, people paid cash for most products and services. There were a few local attempts at credit cards. Some individual stores and gas stations offered charge cards. A few major retailers and hotels offered credit to their most valuable customers. But carrying around multiple cardboard cards or paper identifications was cumbersome and inconvenient. These were useful only at one location or a limited geographic area. Early users liked the ease of purchasing with credit, but it took time to for banks and retailers to develop a convenient system with wide-spread
acceptance.

"It is hard for some of us to imagine a payment system without credit cards. Fifty years later, credit cards are the primary form of payment and are accepted almost anywhere in the world, including McDonalds and the Internal Revenue Service. You can even pay your mortgage or rent and most of your monthly bills with them," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

According to the Federal Reserve, demand for credit increased with the growth of urbanization and mass production of consumer goods. One of the main limits of growth was the lack of sufficient information to judge the credit worthiness of a consumer, so many potential customers couldn't get credit. This changed with the emergence of national credit reporting agencies. Credit agencies introduced a better assessment of risk that helped to make credit cards more widely available to all groups.

Here are some important dates and developments in the evolution of credit cards:

* In 1946, Jon Biggins of Flatbush National Bank of Brooklyn invented Charge-It, the first bank credit card between bank customers and merchants.

* In 1950, Diner's Club was created as a charge card and became the first credit card that was widely used. Frank McNamara, manager of a small loan company in New York, aimed this card as an easy form of payment for salesmen who used it for travel and to entertain clients. This was a new service and McNamara had to solicit subscribers and restaurants to participate. The cards were made of paper stock, and charged no interest. Cardholders paid a $3 annual fee, and the companies who accepted the card had to pay 7% per transaction. It soon became a nationwide network.

* In 1958, American Express offered its own charge card for travel and entertainment expenses. In 1959, it upgraded from cardboard cards and created the first credit card made of plastic.

* In 1959, the revolving balance was allowed. Cardholders no longer had to pay their bill in full at the end of each cycle.

* In 1966, Bank of America introduced the first general purpose card, the BankAmericard. Because of restrictions, banks could not operate across state lines. Despite this obstacle, Bank of America wanted to find a way to expand, so it licensed the BankAmericard to other banks outside its area of operation. Business grew and became complicated and difficult to manage. Bank of America spun off BankAmericard into a separate entity that became the Visa network (changed its name to Visa in 1976).

* Success brought competition. In 1966, a national credit card issuing system was created when credit issuing banks joined together to make the InterBank Card Association. This became MasterCard.

The bank card industry grew. Banks that issued cards had to choose to join either the Visa association or the MasterCard association. Later, banks were able to join both associations and offer both types of cards. Joining Visa or MasterCard associations offered standardization and a processing system that reduced the costs for banks and allowed for growth of the credit industry. The cost of credit card processing is complicated and expensive and is still criticized and challenged by retailers.

* In 1968, Congressional regulation of the credit card industry began with the Truth in Lending Act. This required issuers to disclose all terms and conditions. Later, Congress banned mass mailing of active credit cards to people who hadn't requested it.

* In 1970, 16% of all families had a bank-type card. 37% of those families carried a balance. The mean balance was $839 (Federal Reserve)

* In 1978, the Supreme Court (Minneapolis vs. First of Omaha Service Corporation) ruled that banks could charge any rate allowed in the bank's home state and could charge this rate in any other state. Until then, banks could only charge up to the rate that was allowed in cardholder's home state. To take advantage of this change, major banks moved credit card operations to states like South Dakota and Delaware because they removed caps on interest.

Removing the interest cap gave issuers the opportunity to set rates as high as they wanted. This was a boost for banks because, at that time, the rate of inflation was higher than what they could charge for interest. This change transformed credit cards into a profitable business. At this time, issuers also added the clause that gave them permission to "change rates at any time, for any reason."

According to a PBS story, the Secret History of Credit Cards, "between 1980 and 1990, the number of credit cards more than doubled, credit card spending increased more than five-fold and the average household credit card balance rose from $518 to nearly $2,700. With the cost of money sinking and average balances climbing, profits soared."

* In 1980, President Carter struggled to find ways to tame inflation. One option was by placing a freeze on soliciting new credit card accounts. Credit card issuers took to this opportunity to add a $20 annual fee that was still in place long after the threat of inflation subsided. (PBS Secret History of Credit Cards)

* In 1980, Congress begins the deregulation of the banking industry by passing the Depository Institutions Deregulation and Monetary Control Act.

* In 1986, Discover, originally a part of the Sears corporation, introduced its own credit card and created its own merchant network.

* In 1987, American Express, traditionally a charge card, issued cards allowing customers to carry a balance.

* In 1990, AT&T entered the credit card market by offering a card that waived the annual fee for life under certain conditions. It was a sensation because if you paid off your balance each month, you could use the card for free. It received a significant response and competitors quickly offered cards with no annual fee. Previously, most cards charged a $25 annual fee with an interest rate of 18%.

* In the early 1990's, credit card issuers advanced beyond one-rate-fits-all offers and used credit scores and financial data to develop pricing and credit strategies. They set rates and limits based on computer assessments of an individual's risk of default. The higher the risk, the higher the interest rate. This new data gave opportunities for innovations such as increased credit limits and decreased minimum payments.

* In 1996, the Supreme Court ruling (Smiley vs. Citibank) ruled that fees should be included with the term interest, and could be whatever the bank's home state would allow. This ruling provided the opportunity for issuers to charge more for fees and to create new fees, such as over-the-limit fees. This ruling also opened the door for punitive practices like the Universal Default clause.

* In 2007, 73% of all families carried a credit card and 46.1% of all families had a credit card balance. The mean balance for those carrying a balance was $7,300. (2007 Federal Reserve Survey of Consumer Finances).

* In December 2008, the Federal Reserve adopted credit card reforms that will begin on July 1, 2010.

* In May 2009, the Credit CARD Act passes. A few provisions started on Aug. 20, 2009. Most go into effect in February of 2010.

* In 2009, FICO reports that credit card issuers cut limits for an estimated 58 million cardholders for the twelve months ended in April 2009.