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Cracking down on credit card craziness

For years, banks have taken advantage of their credit card customers with excessive fees and unexpected interest rate hikes. Help is on the way.

Elisa Rizzo of Seattle just got her credit card statement. Her “fixed” interest rate nearly doubled, from 7.99 percent to 14.99 percent, even though she always pays her bill on time and has a good credit score. Why? The bank told her it had to charge the higher rate because of the downturn in the economy. Rizzo says she is “appalled at this action” and wants something done to “stop this madness ASAP!”

Let’s cut to the chase. For years, banks have taken advantage of their credit card customers with excessive fees and unexpected interest rate hikes. People who can barely make their monthly payment are devastated when it doubles overnight. “It is literally in some cases pushing them over the edge,” says credit counselor Renee Chamkunthod.

Help is on the way. In December, the Federal Reserve Board issued regulations to stop what it called “certain unfair acts or practices” that hurt cardholders. Among other things, the new rules will limit unexpected interest charges, prohibit an interest rate hike on pre-existing balances and require a reasonable amount of time for customers to make their payments.

Consumer groups like the new rules. But they say the Fed gave banks way too long – until July 2010 – to implement the changes. Consumer groups want Congress to stop the pain now.

“The Federal Reserve said these are abusive and deceptive practices,” notes Travis Plunkett, legislative director at the Consumer Federation of America. “It’s unfathomable that they would wait a year and a half and let the credit card companies continue to use them.”

Linda Sherry, director of national priorities at Consumer Action, believes the credit card companies “will continue to take advantage of consumers to boost their profits until these rules go into effect.”

Congress is already on the case. Last week, Congresswoman Carolyn Maloney (D-N.Y.) introduced her Credit Cardholders’ Bill of Rights Act of 2009.

“This bill willallow consumers to manage their credit and not get interest rate increases unfairly put on them,” Rep. Maloney says. “They will know the information that is given to them is accurate.”

Senators Charles Schumer (D-NY) and Mark Udall (D-CO) are co-sponsoring similar legislation in the Senate. “It’s time to give the power back to the consumer,” Schumer says. The bill will do that, he says by outlawing “predatory practices” and banning “unannounced, unfair and deceptive fees and rate increases.”

The Credit Cardholders’ Bill of Rights would do many of the same things the Federal Reserve Board’s rules will do, but much faster. It takes effect 90 days after being signed into law. Rep. Maloney tells me she believes Congress will pass the bill “because the public is demanding it.”

It could happen to you!
Karen Reid is a horse breeder on Fox Island, Wash. She calls what happened to her “absolutely criminal.” Her credit card had a “7.99 percent fixed APR.” The ad states that in several places. But last August, her interest rate jumped from 7.99 percent to 20.39 percent on both her existing balance and new charges.

What had Reid done wrong? “Nothing,” she says. “I was never late with a payment ever, to them or anybody else.”

Reid called customer service as was told the rate hike was “a business decision” and did not reflect anything she had done. Her contract, she was told, said the interest rate on her “fixed rate” card could be changed for any reason at any time. “This is just corporate theft in my opinion,” she says. “I am very angry about it.”

The bank said Reid had been notified of the pending rate change. She says she never got such a notice. Reid made enough of a fuss that the bank agreed to roll back the rate to 7.99 percent on her balance as long as she agreed to cancel the card, which she did. Reid was very lucky.

The American Bankers Association says there’s never a guarantee a fixed interest rate on a credit card won’t go up. In other words, it’s fixed until it changes. “It doesn’t make sense to lend money to anyone at a loss,” says Nessa Feddis with the ABA. “The point is for banks to make money.”

Consumer groups say the bills before Congress don’t limit profit, just unjustified rate hikes. “A lender should decide how risky you are before you borrow money, instead of changing its mind and raising your rate after you’re already on the hook,” says Gail Hillebrand, a senior attorney at Consumers Union. And she points out, the bills before Congress would only prohibit changing the interest rate on existing balances. Bankers could still raise the rate on new charges.

Could new rules hurt consumers?
The banking industry has fought credit card reform every step of the way. It reluctantly accepts the new Federal Reserve Board’s rules – which give them 18 months to make changes - but strongly opposes congressional action.

In announcing the new rules last month, the Federal Reserve Board noted that they could result in higher interest rates and less available credit. The banking industry is already warning that will happen. “This will hurt consumers,” says the ABA’s Feddis.

“I don’t believe that will happen,” Congresswoman Maloney says. “Most consumers are asking for reforms. Why wait any longer?”

My two cents?
Let’s say the bankers are right and credit becomes less available. Is that such a bad thing? Does it make sense to give someone a credit card if he or she is unable to pay the bills? That’s what happened in the housing market and we all know where that got us.

Banks should be able to make a reasonable profit. But they should be required to treat customers fairly.

The banking industry will lobby hard against the Credit Cardholders’ Bill of Rights. If you believe this bill should be passed – as I do – now is the time to contact Congress.