Tougher Credit Card Rules Offer New Consumer Guards

JEFFREY BROWN: The first of the new rules Congress passed in May took effect today. Among other things, they require that credit card issuers notify consumers 45 days before an interest rate hike or "significant change" to a contract's terms; mail bills out at least 21 days before payment is due; and allow cardholders to refuse a rate hike, choosing instead to pay off a balance at the old rate.

Additional provisions of the law will take effect in February. We assess what all this means now with Nessa Feddis, vice president and senior counsel with the American Bankers Association and Adam Levin, chairman and founder of Credit.com, a consumer education and advocacy group. He's former director of New Jersey's consumer affairs division.

Well, Adam Levin, what's the most important change here from a consumer protection standpoint? And will these changes help consumers?

ADAM LEVIN, Credit.com: Well, I think that some of the critical changes in the bill have to do with the inability to raise rates on existing balances other than in very specific situations that are either directly related to a consumer or relate to a variable rate card, the fact that over-limit fees can't be charged unless consumers actually opt into it in advance, the fact that we're seeing the end of universal default and double-cycle billing, and the fact that we're going to be...

JEFFREY BROWN: Explain -- I'm sorry -- explain the universal default for people.

ADAM LEVIN: Universal default is basically, if something negative were to occur to a consumer with another credit card or in another particular financial situation, that a credit card company could point to that and immediately jump a rate from, let's say, a 15.99 percent rate up to a default rate, based on the perception that there is something negative occurring throughout the entire credit history of this particular consumer and it may relate to a specific incident. It may relate to just one missed payment on one card, and suddenly the entire financial situation collapses in on the consumer. That's not fair.

A major shift

NESSA FEDDIS, American Bankers Association: Well, I think you have to see that kind of change. Because of the law, credit card companies are going to have to dismantle their existing models and rebuild them based on the new rules.

As you mentioned, the main -- the predominant effect of this new law is that consumers will no longer be surprised by an interest rate increase. For the most part, they will receive a 45-day advanced notice and, more importantly, the option to pay off the existing balance over time at the original rate. And, really, that is the provision that card companies were most criticized about, and that's what's been addressed as of today.

JEFFREY BROWN: Do you see that well enough addressed, Adam Levin? And what about this question of "significant changes"? How is that defined? And is all of that clear enough?

ADAM LEVIN: Well, "significant changes" isn't fully defined yet. I think this is to come, as the regulations are promulgated over time, in order to flesh out the legislation.

There is no question, though, that greater transparency and fairness in the system is critical, and I think this bill addresses that. It's not the silver bullet, but it's a start.

The key thing is the financial literacy and the fact that we've been woefully short-sighted in the way we've treated financial literacy in this country. And part of the problem that's happened in the financial services industry is the fact that many of these documents, many of the notices, many of the contracts that involve credit cards have been very confusing. In some congressional hearings, they've talked about being written in 27th-grade English.

So that's part of what this law is designed to address: to give consumers more time, to give consumers more disclosure, and to give consumers an opportunity to develop strategies in the event that something goes horribly wrong relative to their rate or relative to the fees they face.

Credit tradeoffs?

NESSA FEDDIS: Well, Congress understood when they passed this law that one of the effects would be that many people, many small businesses wouldn't be able to get credit cards as easily, accounts would be closed, limits would be lowered. They also understood that across-the-board interest rates would go up a bit for everybody.

JEFFREY BROWN: Which we're seeing already.

NESSA FEDDIS: Well, we're seeing that in the advertised rates, the new accounts, but they also understood that people who manage their credit well will to some degree be subsidizing or paying for those who don't. But they made the decision that this was an acceptable compromise -- a tradeoff, if you will -- for the consumer protections.

JEFFREY BROWN: Another thing we're seeing or might be seeing would be annual fees going up.

NESSA FEDDIS: Well, we do know that credit rates will go up. Cards will be harder to get. But beyond that, credit card companies will be innovating and experimenting under the new rules, seeing how consumers respond. We know that they'll be looking at everything.

It's hard to say exactly, but they'll be looking at everything. They'll be looking, as you said, at annual fees. They'll be looking at balance transfer fees, cash advance fees. They'll be looking at that interest-free period, the grace period. They'll be looking at promotional rates. Everything is on the table.

JEFFREY BROWN: Mr. Levin, how do you see this tradeoff?

ADAM LEVIN: Well, first of all, it's more than they'll be looking at this. The truth of the matter is, they've looked at it, and they've acted on it, and for the past couple years now, we've experienced almost a reign of terror in terms of the way that the credit card companies have treated consumers.

And we've done surveys at Credit.com over the past several months where an enormous amount of the consumers that we talk to have experienced what they consider negative situations with their credit card.

Also, it turned out that an enormous number of consumers weren't even aware of things that were going on with their credit cards, so perhaps all of the debate over this is a good thing, because more and more people are becoming aware.

But there's no question there's a tradeoff, but it's been happening in response to the deterioration of the economy. And one last question that I really think we should consider, or at least one of the questions is, was some of this not, in fact, a self-fulfilling prophecy by the credit card companies?

When you had many, many consumers who were solid credit consumers, who were paying down their bills, were on a path, had a plan, and had a budget, and then all of a sudden, out of nowhere -- and this happened -- started well over a year ago -- out of nowhere experienced not only a doubling of their minimum payment -- which may not be a bad thing, because it helps reduce debt -- but also an enormous increase, in some cases, 10 or 15 full percentage points in their interest rates, and they'd done nothing wrong.

It was just simply a function of one bank buying another or banks saying, well, based on financial circumstances, this is what we're going to do. And many consumers who were on a path suddenly got knocked off the path.

JEFFREY BROWN: All right. What's your response?

NESSA FEDDIS: Well, I mean, I think that the interest rate changes are a little bit exaggerated. The credit card companies do report the interest rates that their customers pay. They do release that data. The most recent data available shows that, as of the 12-month period ending in May, that on average interest rates did bump up about a point. Individuals' circumstances may vary, but on average interest rates went up about a point in that 12-month period.

And what happened between 2004-2007, interest rates were on average about 14.5 percent. They went down by a point in 2007, and now they're back up at those levels. So they've gone up a bit.

But most people, until the economic downturn, were paying their credit cards on time. The delinquencies were within the historical norms of about 5 percent. But right now, we're seeing those rates go up. Why? Because of the economy, because of unemployment.

We've found that credit card delinquencies very much track unemployment rates, because the first -- the credit card is the riskiest type of loan, because there's no mortgage, there's no collateral, there's no home or car that will incent people to repay their loan or to offset any losses.

And the first bill people stopped paying -- not even the first loan they stop paying, the first bill they stopped paying is their credit card, because they still need to pay their utilities and their telephone bills. So what we're seeing now in the delinquencies is really a reflection of the unemployment rate.

And we're expecting -- the economists say that unemployment is going to stay high, so I think we're still going to continue to see losses continue to rise, and that means interest rates are probably going to stay up, at least for the time being.

JEFFREY BROWN: All right. Well, we have to leave it there for now, but we'll revisit it, if not before, by February, because even more sweeping changes come in then. Nessa Feddis and Adam Levin, thank you both very much.