Credit.com's Levin Makes Sense of New Credit Card Rules

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 worse.

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 investments.

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.

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 the institutions.

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 themselves?

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 untenable position.

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 debt.

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 as well.

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 more trouble.

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 companies.

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 rule changes.

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.