Senate Examines Credit Card Industry Practices
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JEFFREY BROWN: Last year, Americans used more than 600 million credit cards to buy more than $1.8 trillion in goods and services. Today, the average American family has more than $9,000 in credit card debt.
And with the continuing increase in the use of credit cards, the amount of debt, and the number of personal bankruptcies, lawmakers are taking a closer look at the practices of the highly profitable credit card industry.
Among the policies under scrutiny: so-called universal default, where interest rates on one credit card are raised because a customer fails to pay another credit card bill on time; over-the-credit-limit fees charged to customers who are over their limit; and charging interest on an entire credit card balance, even when customers have made timely payments.
Yesterday, executives of three major banks were called before a Senate subcommittee to defend those policies. Sen. Carl Levin is calling for ending some practices and requiring clearer disclosure of credit card rules for consumers.
SEN. CARL LEVIN (D), Michigan: I don’t believe that the average consumer understands it, believes it, thinks it’s fair, and I don’t either.
JEFFREY BROWN: Norm Coleman, the panel’s top Republican, agreed.
SEN. NORM COLEMAN (R), Minnesota: Industry has gone too far, pushed too far, and needs to clean up its act.
JEFFREY BROWN: In one example, Ohio resident Wesley Wannemacher testified that he was charged more than $7,000 in interest charges and late fees for $3,200 in purchases he’d made with a Chase credit card.
WESLEY WANNEMACHER, Witness to Congressional Hearing: It feels like every month you take one step forward, but two steps back, you watch that 30 percent and the other fees just continue to grow your balance. It’s a feeling similar to riding in a submarine, when the water pressure is really high, and every time the phone would ring, it gets hard to breathe, and you’re not sure whether you should even answer it or not.
JEFFREY BROWN: Richard Srednicki, the CEO of Chase Card Services, apologized to Wannemacher.
RICHARD SREDNICKI, Chase Card Services: In this case, we simply blew it. Our politics and procedures failed, and we deeply regret it.
JEFFREY BROWN: Chase has forgiven the remainder of Wannemacher’s debt and said it would no longer charge over-the-credit-limit fees. Citigroup, the country’s largest financial institution, also announced it, too, would eliminate some interest rate increases.
VIKRAM ATAL, Citigroup Inc.: These changes redefine our relationship with every single one of our customers.
JEFFREY BROWN: The problem of credit card debt, already familiar in many American homes, is now the subject of “Maxed Out,” a new documentary that opens tomorrow in a number of cities around the country.
JEFFREY BROWN: Kathleen Day was at yesterday's hearing. She covers personal finance issues for the Washington Post and joins us now.
KATHLEEN DAY, Washington Post: Hi.
JEFFREY BROWN: One of the basic issues here is whether consumers understand the rules, understand the fees, the charges they may face, right?
KATHLEEN DAY: I think there's a consensus -- even the credit card companies agree -- most consumers don't really understand the boiler plate disclosures. Have you tried to read one? If you ask anyone, I think if those executives had been asked to explain line by line what their disclosures mean, they wouldn't have been able to. I think everyone agrees on that.
JEFFREY BROWN: Is the issue there -- I mean, we all get all of this. Is the issue whether it's in the fine print or whether it's even there at all?
KATHLEEN DAY: Well, it's supposed to be in bigger print and in easy-to-understand language. Regulators attempted to do that several years ago.
But as these credit card products have become more complex, with all different kinds of varying rates depending on how you use it, the disclosures have lengthened and become more complicated. And regulators are trying to figure out ways -- they are working on a project now to make this stuff clearer.
But I think the senators, consumer groups, and some states' attorneys general feel that those clarifications of disclosures haven't come fast enough or soon enough to save people.
How fees add up
JEFFREY BROWN: Now, the case of Mr. Wannemacher, who we saw at the hearing, you were there yesterday...
KATHLEEN DAY: Yes, the guy charged $3,200 for his wedding.
JEFFREY BROWN: Yes, now how did those fees build up?
KATHLEEN DAY: Well, he had a $3,000 limit. So when he went over it by $200, they slapped on a fee. And, of course, they let him go over it, but then they start raising his interest rates, because then he's considered a higher risk because he's gone over his limit. Then he fell behind on some payments.
They raise it more. They put on late fees. They continue to charge interest on the fees that they've put on. It spirals out of control. And instead of just extracting a higher interest rate for someone they consider to be a higher risk, I think consumer groups and the senators yesterday were arguing the company's policies made that person riskier. They were actually pushing him into financial difficulty. They weren't just charging him more because of his difficulties; they were pushing him into it.
JEFFREY BROWN: And were they suggesting, the consumer groups and the senators, that this is a fairly common -- I mean, was that an extreme case or is that a fairly common example?
KATHLEEN DAY: I think it's too common. I don't think it's the majority of credit card customers, but I think there are many people who are living check to check who fall into financial difficulty in this country. I don't think it's an isolated case.
I think yesterday's hearings dealt with two issues. One were onerous fees and charges that pushed someone who isn't making a lot of money over the edge and maybe he shouldn't have been extended all that credit in the first place. That's one issue.
The second issue are practices that are imposed on rank-and-file people who are not in financial difficulty, and the senators were saying may be legal, but unethical. And one of those is charging you on interest on a bill you've paid.
JEFFREY BROWN: Yes, explain that. So is this if you've paid -- you've paid in a timely fashion?
KATHLEEN DAY: Right.
JEFFREY BROWN: But you haven't paid it all?
KATHLEEN DAY: Right. And this is what's in the fine print. They don't spell out. I didn't understand this, and now I certainly do.
If you charge $5,020 -- this was an example yesterday -- on a credit card, and you get your bill, and it's due on a certain date, and you pay $5,000 of it, you will get a bill the next month -- and you paid on time -- you will get saying you owe the residual $20, which no one disputes, but you'll also get an interest charge of $34.
That's more than the residual, because they will go back and charge you an interest rate on the entire $5,020. Whereas if you'd pay $5,020, they give you a grace period.
In other words, they eliminate the grace period on interest rates on being charged an interest rate if you pay it in full, but if you pay most of it, but not all of it, they impose the interest charge on all of it. I don't think most Americans with a credit card understand that.
JEFFREY BROWN: Is it legal?
KATHLEEN DAY: That is legal. All the major credit cards do it, but Levin and Coleman yesterday were questioning -- I think there's a question of, first, do people understand the product they're buying?
And, separately, I think Levin is saying he thinks that's an unconscionable -- he thinks that's not right. You shouldn't be charged for something you've paid. But before you even get there, people should at least understand it.
Companies 'change their tune'
JEFFREY BROWN: Now, we saw in the clip one of the bank officials was apologizing to Mr. Wannemacher, certainly. What were they saying more generally about these kinds of practices now that the spotlight is on?
KATHLEEN DAY: Well, the spotlight on them has certainly made them change their tune very quickly in two weeks. And, by the way, they haven't done everything wrong.
I mean, part of the reason this has come to be is that many more people can get credit now, because credit card companies are much better able to assess the risk of individuals. The question is whether they've gone too far.
They're saying mea culpa. They're saying that some of their practices have become -- perhaps have stepped over the line, as Sen. Coleman put it, but, you know, you have to wonder.
This Mr. Wannemacher was asked to testify on a Thursday. And for seven years, he's been arguing with the credit company, "Please, can you just waive some of the late fees?" He's already paid double what he owed. He said, "Please, I need some relief."
Suddenly, the Monday morning after he's agreed to testify, he gets a call from Chase saying, you know, "We're going to forgive the $4,500 more we say you owe us." They were going to charge him $10,700 for a $3,200 bill.
Suddenly, they say, "You know what? We erred." And he asked them. He said, "Does this have anything to do with my agreeing to testify?" And they said no, but, of course, the officials I talked to said, of course, it was brought to our attention, and we want to fix it.
Credit and the bankruptcy bill
JEFFREY BROWN: It was just a couple years ago, of course, that there was this bankruptcy bill that was passed to make it harder for people to declare personal bankruptcy.
KATHLEEN DAY: It's harder to wipe out debt through bankruptcy. And this was pushed by the credit card industry and Levin, Sen. Levin, and Sen. Chris Dodd, who's now chairman of the House Banking Committees, these are senators who thought at the time that this was passed, that they said, OK, if you're going to make it harder for people to declare bankruptcy, make it easier for them before they get into trouble to understand how these products can spiral out of control.
People don't understand, if you have a thousand-dollar debt, and you only pay a minimum balance of $15 a month, it's going to take you years and years and years to pay it off, and you're going to be accumulating lots of interest rate. You're going to pay hundreds and tens of thousands more in interest.
JEFFREY BROWN: The politics, of course, has changed in two years, and thus -- but it sounds as though Republicans are also pushing here.
KATHLEEN DAY: Well, it's hard not to when you see a case like Mr. Wannamaker's. But when the bankruptcy bill passed, the industry fought it tooth and nail. There was a compromise. There was a kind of boilerplate disclosure. But now, suddenly, I think the credit card industry is much more amenable to clear disclosure.
JEFFREY BROWN: All right. Kathleen Day of the Washington Post, thanks very much.
KATHLEEN DAY: Thank you.