Congressional Plan Won't Correct Credit Card System's Most Basic Problems

April 29, 2009|By JAY HANCOCK

The liberal case for credit-card reform is well known: Greedy banks victimize card users with high interest rates and outrageous fees; Congress must crack down to make the system fair.

Here is the less-known, conservative argument: Credit card complexity prevents users from making rational decisions about borrowing and spending, thus hurting the economy; Congress must intervene to make the system understandable.

Unfortunately, Congress might not take either course. Bills in the House and Senate would end the worst abuses but do little to stop stalker lending or cut the fine print.

Credit card practices are so out of control that even legislation that consumer groups see as a huge step ("Great news on the credit card front!" says Consumers Union) would leave plenty of room for trouble.

"We still have the problem of high interest rates" that aren't addressed in the bills, says Charles Shafer, a law professor at the University of Baltimore and president of the Maryland Consumer Rights Coalition. "We still have the problem of misleading disclosures and these teaser rates that lull people into thinking they can borrow a lot of money.

"We still have the problem of having lots of fees - annual fees, fees for late payments, fees for going over the limit, whatever."

Credit card lending has gotten almost as bad as mortgage lending. In both cases, impenetrable complication hid trapdoors for consumers. Now credit card losses at Citigroup, Bank of America and other lenders are approaching 10 percent, even as banks hoist rates in a recession.

Most customers pay attention only to a card's initial rate, annual fee and how many air miles they get.

They don't know companies can crank up interest charges if you miss a payment. Or if you miss a payment on a loan that has nothing to do with your credit card. Or if you go over your limit. Or for no reason at all. Whenever they want.

Few people have any idea that banks can apply payments to, say, a transfer balance charging zero percent when the customer wanted to pay down the main balance costing 17 percent. Or that, if you paid your balance last month but not this month, banks can still charge interest for last month with the "two-cycle billing" trick.

"Credit card companies understand consumer behavior better than consumers do," said Travis Plunkett, legislative director for the Consumer Federation of America. "They reduce front-end barriers and lure people in with inordinately low interest rates and then whack them on the back end."

Rules recently adopted by the Federal Reserve will end two-cycle billing and require more-than-minimum payments to be applied to higher-rate balances. A Senate bill would ban increasing rates on all your loans even if you missed payment on only one. President Barack Obama might ask Congress to go further by requiring better disclosure and making teaser rates last at least six months.

But teaser rates are still there! None of the measures eliminates complexity. All the disclosure in the world won't help if people can't understand it.

Think about the tax system, which also impedes the economy through complicatedness. We need a credit card version of Steve Forbes' ill-fated flat tax, which would have been filed on a postcard.

You want my credit card business? Give me one interest rate, which you may not change. Show me what the late fee is, in big print. That's it. Oh - and take me off your junk mail list.

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