Credit.com's Levin Makes Sense of New Credit Card Rules
Dramatically hiked interest rates, new hidden fees, slashed credit lines -- many consumers have felt their credit cards go from convenience to liability over the past year. But new reforms are forcing credit card companies to change the way they do business. Paul Solman speaks with Credit.com's Adam Levin for insight.
PAUL SOLMAN: Hi everybody! Welcome to Pocket Change, our
personal finance feature. I'm Paul Solman and with me, Adam Levin.
ADAM LEVIN, Credit.com: How are you sir?
PAUL SOLMAN: And you are the chairman and co-founder of Credit.com, which I guess we should define to be a consumer education advocacy
ADAM LEVIN: Yes sir, education, advocacy, products and
PAUL SOLMAN: OK, cool. And also the former director of New
Jersey's Consumer Affairs Division.
LEVIN: Yes sir.
Adam Levin Credit.com
We've gone from 'no borrower left behind' to "no borrower left standing" to now those borrowers that really weren't even borrowing a lot being unceremoniously flung off a trestle as a train goes by.
New credit reforms on the books
PAUL SOLMAN: OK, great. So we're here to talk about credit
card changes. What companies can do, what they can't do, new rules in Congress
and so forth. Some already in effect and others coming.
So, first of all, rule changes affecting consumers. What are
the major changes that have already taken place and what do they mean if you're
somebody like me or you or, I assume, all our listeners who actually have
credit cards? Or most of them do anyway.
ADAM LEVIN: Well, on August the first phase of the Credit Card
Reform Act took effect. One is that credit card companies have to give you 45
days notice as opposed to, I guess, what was 15, of changes to your rate on a
prospective basis, as well as anything that would be considered a substantive
change to your card. Secondly, in the event you're notified of a rate that is
unacceptable to you, you have the right to opt out and have a significant
period of time to pay off the credit card without any penalty. They have to
allow you to do it at the old rate.
And the third and equally important change is the 21-day
rule, which is a lot of people were very upset about the fact that they would
get their credit card bill, but it would be so close to the due date that if
they were off by a day or two and mail was late by a day or two, all of a
sudden they were late and they would incur a late fee. So the 21-day rule says
that the bill has to be mailed and received by the consumer at least 21 days
before the due date.
There was actually a very famous case a couple of years ago,
maybe even more than a couple of years ago, brought by the government in
California against one of the credit card companies that was actually receiving
payments and then holding them on purpose until they passed the due date and
then charged the consumer a late fee.
PAUL SOLMAN: Oh, it's so depressing to hear things like
that. When were you the head of Consumer Affairs in New Jersey?
ADAM LEVIN: 1977-1982.
PAUL SOLMAN: OK. So you've been in this game for a long
time. Has it gotten worse? Have companies gotten worse?
ADAM LEVIN: Well I don't know whether they've gotten worse
or they've gotten more creative, which by definition means they've gotten
PAUL SOLMAN: Yes, I would say let's include creative in the
definition of worse, pushing the envelope... Are they pushing the envelope more
than they used to?
ADAM LEVIN: Oh, I think totally and I think that if you look
at what's happened in the past let's say 4-5 years, we've gone from "no
borrower left behind" to "no borrower left standing" to now
those borrowers that really weren't even borrowing a lot being unceremoniously flung
off a trestle as a train goes by.
So this is what's been happening. We've been
living through a reign of terror from the credit card companies and the banks
that were involved with credit cards now for a few years. They've been
responding to the economy, they've been responding to issues that were created
on their own balance sheets and unfortunately they've been balancing their
balance sheets on the backs of the credit card holders, which is kind of what
the insurance industry was doing back in the 70s when they had made bad
investments and were raising premiums to make back that which they lost in bad
One perfect example is that you have credit card companies
saying that they you know, they're going to change their ways. They haven't really
changed their ways, and they just simply - one fee disappears, a new fee appears.
So now they're going to have less flexibility with rates, they're going to have
to be more careful on fees, so now they're all switching to variable rates to
help them get around the 45-day rule because if it's tied to an index, it's
going to go up and everybody knows the rule, and the fact it's tied to an
index. So now they're going to charge annual fees just like in the debit card
area. The debit card... Companies that were involved with debit cards were
making $28 billion in overdraft fees, or over limit fees.
PAUL SOLMAN: $28 billion a year?
ADAM LEVIN: A year! This year! In 2009, it is predicted that
the companies that are involved with debit cards will generate between $27-28
billion in over limit fees, as well as another let's say $11 billion in bounced
check fees. You're talking about the over limit insufficient fund world is
generating somewhere around $39 billion in fees.
And one practice was uncovered
where if you had four charges that would put you ultimately over the limit on
your debit card [and] one of the four definitely puts you over the limit, the
other three would have kept you under the limit... These companies were
charging the first charge first regardless of its chronological order so that
they could not only hit you for that over limit fee, but also hit you for the
three additional over limit fees. This is what's been going on.
This is why
Congress has gotten even more upset, the American have gotten more upset. This
is why [in] the new survey that Credit.com did, 56 percent of the American
people who were part of this survey said they wanted the Credit Card Reform Act
implemented in December, not in February.
PAUL SOLMAN: I don't even have a debit card. So not all
Americans have debit cards.
ADAM LEVIN: No, and that's why you know we tell people, like
for instance on a debit card, just ask the bank to remove your over limit
program. Just say: I don't want it anymore! If I hit zero decline the charge.
Adam Levin Credit.com
If you find yourself as a consumer in a position where you are drowning, don't try to solve the problem yourself if you're not up to the task, because you can only get yourself in more trouble.
Where to turn for help
PAUL SOLMAN: All right. Let's get very specific with regard
to the questions. So August, one set of rules. New set of rules coming in. Is
this going to be good or bad for people with good or bad credit history?
ADAM LEVIN: Oh, there are some that will say that credit is
going to get tougher to get, that credit is going to get more expensive, that
ultimately rates are going to be raised over time, that rewards are going to be
diminished. But you know again, those who are regulated will always tell you
that anyone who wants to regulate will end the economic system as we now know
it by adding a regulation.
PAUL SOLMAN: And therefore at a cost, and the cost will have
to come somewhere because there is no free lunch.
ADAM LEVIN: Right. But let's think about the fact that over
the past three years the reign of terror that we've been talking about has gone
on and it was before they even had the glimmer of the Credit Card Reform Act in
their eye. If you read a lot of predictions by Meredith Whitney, who is the
banking analyst, she was talking about the fact that they're going to cut
trillions of dollars over the next few years simply to reduce the exposure of
So that in and of itself was going to create the problem. The
question you should ask yourself also is: Was the problem with the default and
the delinquencies that all the banks have pointed to, was this not to some
extent a self-fulfilling prophecy created by the credit card companies
Example: You have a consumer who's making appropriate
payments, more than the minimum payment, has a budget, good credit consumer,
paying on time, trying to do the right thing. All of a sudden they get hit with
a minimum payment, which doubles, and on top of that an interest rate increase
of between 10-12 full percentage points based on nothing they did. It was based
on an environmental repricing because the credit card company said: We're repricing
based on risk in the marketplace. Is it not possible that that consumer
suddenly has been taken from a position of comfortably dealing with debt and
now placed into a suffocating situation?
PAUL SOLMAN: How about bankruptcy? Do those, if it's
concentrated in a small number of people, and so you're talking about people
who are being charged hundreds maybe even thousands of dollars a year for going
over their limit on their credit card or on their debit card or both, then don't
they inevitably... I actually have a friend who is certainly thinking about and
reading up on the bankruptcy laws because his only option given what you're just
talking about -- the hiking of his credit card payments -- is forcing him to an
ADAM LEVIN: Well, there's no question that many people are confronting
and, in fact, some people are embracing the darkness of default and bankruptcy
but there are a lot of organizations out there, legitimate ones, that are counseling
consumers and working with them to help them reduce their debt or at the very
least help them reduce the interest payments or interest requirements on their
PAUL SOLMAN: And your favorites are?
ADAM LEVIN: I've always liked Consumer Credit Counseling
Service. I think a lot of them, I mean some are OK, some are fabulous depending
on where they are in the United States.
PAUL SOLMAN: They're state...?
ADAM LEVIN: They're all over the country but they you know
they have certain zones and regions where some are particular standouts. And
there are some that are totally fabulous and have been you know, been award
winners and highly respected. And you know then you have a lot of other companies,
debt settlement companies which raise a lot of questions and consolidation
companies which have raised questions... Because you know some of them are
based on the theory that if you're current you should wait until you're way
behind so that the creditor is then hungry to make a deal with you and then
they cut a deal where they can ultimately cut the amount you owe. The problem
is that it destroys your credit and it can put you in a very untenable position
So consumers have to be very careful, they need to
communicate with the Department of Consumer Affairs or the Office of the
Attorney General in the different states to get a feel for what the reputations
are of a number of these companies. But you know again, if you find yourself as
a consumer in a position where you are drowning, don't try to solve the problem
yourself if you're not up to the task, because you can only get yourself in
Adam Levin Credit.com
There have been reports that [some] credit card companies were experimenting with changing the look and feel of their envelopes...to make them look more like junk mail...[N]ever underestimate the creativity of the financial services industry.
More reforms in the months ahead
PAUL SOLMAN: OK. So what are the major changes that are
supposed to take place in February -- although Barney Frank and others, I guess,
have suggested it and you've suggested, maybe we would move it up to December
or something like that. So what are the changes?
ADAM LEVIN: Yeah, a lot of the changes are, for instance,
that they can't raise your interest rate on an existing balance simply because
the world has changed. They have to base it on either you're 60 days late or it
is the end of an introductory program which now introductory programs have to
be a minimum of 6 months. Or you are part of a variable rate program and the
rate is going up based on the fact that it's tied to an index. So the old days
of just you wake up and you find out that the balance that you were paying 12
percent on you now pay 28 percent on isn't going to happen in the absence of
those specific situations.
On a prospective basis they can't tell you they're raising
the rate on future purchase within the first year of you having a new credit card
and they have to give you 45 days notice. So it's not something that's instant.
In addition which they don't do, they can't do double cycle billing anymore,
which is where they billed you and then they would charge you interest on what
you really already paid. That was one of the favorites of the credit card
PAUL SOLMAN: I don't understand that one.
ADAM LEVIN: Yeah, it's just one of those very complicated
things, they use a complicated formula and you paid... Depending on what day
you paid it they would go back and charge you additional interest and it was
one of the ones that was pretty unfair.
In addition to that, they have to tie any fee that they
charge you to a reasonable number. In other words they can't just jump the fee
to some unconscionable number, there has to be some relationship between the
cost they claimed they're incurring and the fee although I think that's a
pretty slippery slope, that's one that's going to be open for a great deal of
definition and wrangling over time. In addition they can't when you make a
payment when you transfer the balance over to your credit card and you make a
payment, they have to apply the payment -- anything over the minimum payment --
to the higher interest portion.
PAUL SOLMAN: Ah, I see.
ADAM LEVIN: What most people didn't realize was that it was
being applied to the lower interest, so the higher interest would be floating
around forever. And I think also one of the very big changes is marketing to
students. Now you can't offer a credit card to someone under 21 unless they
either can prove independent ability to pay, or a parent or responsible person
is willing to co-sign for them which will stop some of the circuses that were
going on at university campuses over the past few years where young people
would have to navigate a gauntlet between their dorm room and their classroom
with t-shirts and free pizza slices and rewards points on Spring break and free
concert tickets and things like that.
PAUL SOLMAN: Right.
ADAM LEVIN: So a lot of this is going to change.
PAUL SOLMAN: For the good I take it?
ADAM LEVIN: And again yeah, and I think that again one of
the critical elements of this too is that the print will be bigger, bolder,
better positioned and more easily understandable and less fine but none of that
means anything if consumers aren't going to read it.
PAUL SOLMAN: Yeah, and certainly I know and we've gotten a
number of these notices in the mail recently, I guess maybe after the August
ADAM LEVIN: There have been reports that certain of the
credit card companies were experimenting with changing the look and feel of
their envelopes that contain notices to make them look more like junk mail so
that people would be even less inclined... You know never underestimate the
creativity of the financial services industry.
Adam Levin Credit.com
People should look at their accounts online at least once a day, 5-10 minutes a day. [And] get a grip on what you're spending, where you're spending and how close you're coming to the line.
Managing your credit
PAUL SOLMAN: So let's talk a little bit more about what's
happening to people. We get on the Business Desk, we get questions every week I'd
say: My rates just got raised, I'm told that my credit rating is lower because
I canceled an account... It's people who are not only baffled by what's going
on but don't know how to keep their rates down, their credit rating up with
regard to credit cards. Can you explain a few of the things that you would
recommend or do recommend to people to do to pay as little as possible in terms
of interest and so forth and to have as high a credit rating as possible?
ADAM LEVIN: Well sure. Well first of all there's a few
things that people should do and I mean some of these are sort of, have multi-levels
of positive purpose. First is that people should look at their accounts online
at least once a day, 5-10 minutes a day.
PAUL SOLMAN: Really?
ADAM LEVIN: Look at your bank account, look at your credit
card accounts -- for two reasons. One to make absolutely sure that every
transaction you see is your transaction because it could be early warning for
an identity theft problem, which could radically impact your credit scores if
identity theft runs amok in your life.
The second reason, which is equally important, is that you
need to get a grip on what you're spending, where you're spending and how close
you're coming to the line. Are you coming close to zero in that particular
account? You know one of the big algorithms that play here with credit scores
is the amount of your available credit that you're utilizing.
PAUL SOLMAN: Algorithm -- you mean the formula that they use
for your credit rating?
ADAM LEVIN: Yeah, that's one of the elements. Thirty-five percent
of your score, 30 percent of your score is utilization rate. So you look across
your entire consolidation of credit, they look at how much credit you are
actually using which is your credit line, your credit cards and the like, and
they make a determination. If you're using more than 10 percent it begins to
impact your credit score, if you use more than 35 percent, it impacts your
credit score negatively.
PAUL SOLMAN: I see. So that's why - I guess I knew this
already but -- that's why I'm reminded if you close out an account, it can
adversely affect your credit rating because suddenly your total amount of
credit has gone down. You're still using the same amount of credit, therefore
it' s a higher percentage of the total, therefore you're deemed to be riskier
therefore your credit rating goes down.
ADAM LEVIN: Precisely. And the second part of that is that
if you close an account that was a very long-standing account, you are also potentially
impacting the age of your credit score, which also accounts for a percentage of
your credit score.
PAUL SOLMAN: So if you cancel an account where you used to
have a modest -- you were not using much of it, which is presumably why you would
cancel it in fact because it's just a pain. And so you weren't using much of it
over a long period of time -- that was really helping your credit score?
ADAM LEVIN: Yeah, it was! It was! And that's different now
because we have a lot of institutions that are cutting credit limits and
closing accounts for people who they think are not using their credit cards
enough. This is a very, very kind of delicate line that people are balancing
right now, if the fact that, on the one hand, you don't want to spend too much because
that'll get them scared, and then the other hand you don't want to spend too
little because that'll get them bored. And you get a bored credit card company
saying: You're not interesting to us , we're cutting, we're closing your
account because we have to carry balances, we have to carry reserves against
your available credit and you're not interesting enough to us because we're not
making any money on you.
PAUL SOLMAN: And then they cancel your account. That then
raises the ratio of the amount of money you're borrowing to the total amount
you can because you now have less ability to borrow because your account has
been closed and that adversely affects your credit score.
ADAM LEVIN: Precisely! So I mean it's...
PAUL SOLMAN: It's kind of funny!
ADAM LEVIN: So it's one of the spirals into the black hole
of depression but this is what's going on right now, that's why looking at your
accounts on a daily basis is important. Secondly, that's why using different
credit cards... Mix them up! One month use one credit card, maybe run a little
bit of a balance, pay it off a couple of months later. The next month use
another credit card, pay that off immediately. It's important for them to see
activity, not irresponsible activity, but it's important for them to see
something going on.
PAUL SOLMAN: So that you... So that they will keep that
credit card alive, that account alive for you?
ADAM LEVIN: Right. And if you paid down an account to zero,
shred the card, put the card in a safe deposit box, attach it to your dog's collar,
give it to your mother, whatever you want to do as long as you have control
over it. Just don't spend it, but don't close it!
PAUL SOLMAN: Really?
ADAM LEVIN: Yeah. You don't close that account because again,
as we said earlier, it would impact the amount of your available credit and
could affect the age of your credit history. So pay it off, but don't kill it.
PAUL SOLMAN: Well, now what about people who are moving from
one credit card to another to get the lower teaser rates? They're, you know,
cycling through to keep their net rate down by obviously switching to a new
account when the old account bumps to a higher rate.
ADAM LEVIN: Well again, if it's an even swap or a better deal,
in other words, you are swapping up to a bigger available credit opportunity
and it hasn't been a terribly long-standing account, that's not so bad --
although the card companies are very sensitive to what they call 'card hopping.'
PAUL SOLMAN: Card hopping -- that's what I'm talking about.
ADAM LEVIN: Yeah, if you do card hopping too much, they're
not convinced that you're serious. They feel that that's not necessarily an
indication of a responsible credit history.
PAUL SOLMAN: And finally, I guess let's just end with this.
So, you do this survey of 1,000 consumers, right? And I'm looking at the
results here. Almost half of consumers in the most recent survey you did say
their credit card company has either increased the interest rate, increased
fees, lowered their credit limit, increased minimum payment or reduced the
rewards program. And it looks like the biggest single chunk is people, is the
companies that have increased their fees -- that's 20 percent.
ADAM LEVIN: Yes, 20 percent, and then 27 percent increased
the interest rate. I mean, every day you hear about Wells Fargo is increasing
by three full percentage points, American Express increasing by four percentage
points for some people.
PAUL SOLMAN: Yeah, but it's a little weird isn't it? I mean,
interest rates in the economy as a whole, short-term interest rates as set by
the Fed are down to zero and long-term interest rates really haven't increased
much -- maybe a percentage point since the depths of the crisis, but no more
ADAM LEVIN: No, this is what is making people the craziest
and legitimately so is: Why is it that you're getting the greatest deal
possible, bank and credit card company, and we're getting hosed? That's where
we have rate rage in this country.
People are just really upset about the fact that the rates
keep on going up. A lot of people that have always done it right and they're
seeing their rates increase and because a lot of the banks again are raising
rates and doing what they need to do before the implementation of the Act. So it's
very... It's different than it was. Plus we're in a moment of institutional
schizophrenia. On the one hand we're passing laws to protect ourselves against
the actions of financial services and institutions and on the other hand based
on the bailouts we are becoming the shareholders of the institutions against
which we are passing laws to protect ourselves!
PAUL SOLMAN: All right, well Adam Levin, thank you very very
much, I really appreciate this.