Want to get an earful? Just ask consumer advocates what they think about credit card companies. That’s what I did last week, after the Government Accountability Office (the watchdog arm of Congress) released its study of the credit card industry. The report validates what consumer groups have been saying for years — credit card rates and fees are too complex and confusing.
In preparing its report, the GAO interviewed 112 credit card holders and found that most did not understand their contracts, including what would trigger penalties or higher interest rates. (Read the full report, in PDF format, by clicking here.)
GAO says the disclosure forms it looked at “buried important information in text, failed to group and label related material, and used small typefaces.”
Most of these materials are also written above the reading level of about half the adults in this country.
“Disclosures create some challenges for consumers,” acknowledges Tracey Mills, a spokeswoman for the American Bankers Association. She says the industry wants to make it easier for customers to understand all the terms and conditions related to their cards. Mills says banks are just waiting for new government guidelines.
Consumer groups believe the confusion is deliberate. “A credit card shouldn’t be so difficult to understand that you need to sit down for an hour to read your contract,” says Gail Hillebrand, a senior attorney with Consumers Union. She believes credit card companies “are counting on you not understanding the full cost of using your card.”
Linda Sherry, director of national priorities for Consumer Action, says the credit card industry “has too many unfair practices, too many hidden fees and too many policies that people can’t figure out.”
Everybody knows credit card companies check your credit report when you apply for a card. What you might not know is they keep checking your credit even after issuing you a card. They say they want to make sure you don’t become a big credit risk.
Here’s what that means to you. If you have problems with one of your credit cards — miss a payment, pay late, or go over your limit — you could see rates skyrocket on your other cards. This is known as the “universal default” provision and it’s used by about half the credit card companies. I’ve seen a default interest rate as high as 30 percent. Ouch!
This interest rate, which can be two, three, even four times as much as you had been paying, boosts your minimum monthly payment and puts you deeper in the hole.
And that new, higher interest rate isn’t limited to new charges. It’s retroactive, so you’ll pay it on your existing balance, which you originally charged at the lower rate.
“What business in America is allowed to change the price after you buy something, except the credit card industry?” asks Travis Plunkett of the Consumer Federation of America. “How could they possible justify that?”
Mills of the bankers association says this “risk-based pricing” makes it possible for more people to get credit. If your creditworthiness changes, she says, banks need to adjust the rate you pay.
Confusing computations
The GAO report says two of the six largest card issuers use what’s called two-cycle or double-cycle billing. It means your interest payment is based on your average daily balance over two billing cycles, not one.
“Two-cycle billing typically hurts people who carry a balance a few months during the year,” explains Consumer Action’s Linda Sherry.
This is very important — two cards can have the same interest rate, and yet your interest payment on the same outstanding balance will be different, depending how that interest is calculated.
Consumers Union suggests if a card you already have uses two-cycle billing, you should look for another one.
Pay late and you should expect to get dinged with a fee. According to the GAO report the average late fee is now $34, up from $13 in 1995.
But how do you know your check really arrived late? Credit card companies are allowed to list a payment due date and time; for instance, Oct. 23 at 10 a.m. But what if they don’t get the mail until noon or don’t get to those letters until the next day? Too bad, your payment is late.
Consumer groups want them to use the postmark date to determine if you paid on time. If you get a late charge, and you think you paid on time, dispute the penalty. You can probably get it removed, at least the first time.
Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group, says current regulations give credit card companies “a license to steal.”
The financial services industry is extremely influential on Capitol Hill. So credit card companies have gotten a free pass for years. Consumer groups say there hasn’t been a single substantive piece of credit card legislation passed by Congress in the last decade.
Nothing will happen if Congress thinks consumers are willing to accept things the way they are. Your lawmakers need to hear from you. If you are interested in doing so, click here for a special Web site set up by Consumers Union.