Opinion: Credit Card Users Need Relief Now

(Nov. 24) -- As you reach for your credit card this holiday season, be aware that your bill may have some unpleasant surprises in store for you: interest rate hikes and decreased credit limits, even if you have good credit and pay your balances on time.

Congress passed a law in May to crack down on the abusive practices of credit card companies and stop these tricks and traps from happening. However, the law doesn't go into effect until February. This nine-month phase-in period was supposed to give companies time to prepare for the new rules.

But instead, many creditors are taking advantage of this window to sneak in last-minute "gotchas" -- jacking up interest rates, slashing credit and increasing minimum payments without notice -- in order to turn a higher profit.

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OPPOSING VIEW: Freezing credit card rates now would hurt consumers, says Kenneth J. Clayton at the American Bankers Association.
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When is enough, enough?

Congress is attempting to move the effective date of the law -- known as the Credit CARD Act -- from February 2010 to December 2009. But this bill, which passed in the House earlier this month, is now stuck in the Senate.

Nonetheless, there may be good news for consumers who will use plastic this holiday season.

The Federal Reserve Board, which oversees the banks that issue credit cards, is considering a set of rules that could have big impacts for holiday shoppers who use credit this year.

There are four things the Fed can do right now to stop these abusive practices:

Stop credit card issuers from coercing customers into accepting interest rate hikes that will be illegal under the new regulations. Credit card companies are trying to push higher rates on cardholders by drastically raising the monthly minimum payments consumers have to make on balances -- even on cards that had a promotional fixed interest rate for the life of the loan. That gives card holders with large balances the difficult choice of accepting as much as a 250% hike in their minimum payment or a higher interest rate. Come February, the Credit CARD Act will prohibit card issuers from raising interest rates on existing balance unless the customer has been more than 60 days late on payments. The Fed can speed this relief to consumers.

Protect consumers from credit card contract changes that hurt credit scores. Credit card issuers have started closing accounts and reducing credit limits for many customers, which can have a negative impact on your credit score. The Fed should require creditors to freeze an account, rather than close it, when a customer rejects a rate increase or change in terms.

Make it easier for consumers to earn their way out of a penalty interest rate. Under the Credit CARD Act, consumers who pay their bill more than 60 days late can be hit with a penalty interest rate on existing balances. But the law will let you earn your way out of the penalty interest rate if you pay your bill on time for the first six payments after the interest rate is assessed. The Fed should expand this and allow you to earn your way out of a penalty rate after any six consecutive on-time payments, not just the first six payments.

Require card issuers to provide written notice about a consumer's right to opt in for overlimit coverage. If customers opt in for this coverage, then the card issuer will allow transactions that exceed the credit limit, but the customer will be hit with a high fee. Customers who do not opt in won't be able to go over their limits. The Credit CARD Act says that card issuers can provide oral, written or electronic notice to customers about their right to opt in for overlimit charges.

With Black Friday fast approaching, credit card companies have wasted no time coming up with inventive ways to hit consumers with high interest rates and fees. Some creditors would like nothing more for the holidays than to saddle customers with a never-ending cycle of debt.

The Federal Reserve can and should intervene and stop these unfair tricks and traps.
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Pam Banks is senior policy counsel for financial services at Consumers Union, the nonprofit publisher of Consumer Reports magazine.