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Wednesday, May 21, 2008

Credit Card Abuse Crackdown

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Just how unfair and deceptive are some credit card policies? So unfair that federal regulators have taken the unprecedented step of trying to ban some of the more egregious industry practices.

“The abuses have grown worse over the years,” said Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group. “This industry has operated without fear of either market or regulatory action to temper its excesses, at the expense of the public's welfare.”

Under proposed banking rules, credit card companies would have to give consumers more time to make payments before charging late fees. If a credit card bill carries two different interest rates, card issuers would be barred from applying payments the portion of the bill with the lower interest charge first. They also would be limited in raising the interest rate on an outstanding balance.

Fees now account for 39% of the revenue for credit card issuers, or $18.1 billion last year, according to R.K. Hammer, a bank card advisory firm. Mierzwinski said that fees have been a growing, reliable revenue stream for banks. Revenues from bank fees have risen 41% since 2003.

“Credit cards are the most profitable part banking, and that’s not according to me—that’s according to the Federal Reserve Board,” Mierzwinski said. “If a bank’s mortgage division or hedge fund managers are losing money, there’s extra pressure on the credit card people to make even more money.”

The federal agency most responsible for enforcing federal trade commission rules regarding credit cards is the Office of the Comptroller of the Currency (OCC). But for the past seven years or so, Mierzwinski said, the OCC has not imposed a single civil penalty on any big bank for doing anything unfair, and has been blocking enforcement actions by states’ attorney generals and legislatures.

One such practice is double cycle billing, where cardholders pay interest on money that is already paid back. So if you owe $1,000 at the beginning of a billing cycle, and pay $500 toward the balance, under double cycle billing you will be charged interest on all $1,000 in the next billing cycle. “The feds said, ‘You know, we thought about it after allowing double cycle billing for 25 years, and decided it really is unfair to charge interest on money that is already paid back,’” Mierzwinski said.

The proposed rules, which also address fees on savings and checking accounts, were written by the Office of Thrift Supervision, the Federal Reserve Board and the FDIC. The public has 75 days to comment on the reforms, which are expected to take effect by the end of the year.

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