Debate on Proposed Changes for Credit Card Industry

Sweeping reform or a solution that comes up short? That’s the debate in regard to the proposed changes for the credit card industry. Changes would include elimination of the practice of retroactively upping interest rates and late fees charged with no reasonable time frame in which to make payment.

The Federal Reserve has been contemplating the changes for several months and Congress has been pressuring the Fed to implement the plan in full strength. A plan to include prohibitions on overdraft fees charged is likely off the table until a lengthier consideration period is undertaken, as consumer advocates and banking industry representatives alike considered the current proposal in that respect to be flawed.

Probably the most significant regulation would involve a ban on raising interest rates on existing balances unless a minimum 30 day grace period is first given to the consumer. Also of significance is the provision requiring banks to give a fair amount of time to make payments before they are considered “late”. Banks would be able to increase interest rates in the case of variable rate accounts or promotional rates offered only for limited periods of time. A further aspect of the proposal involved how banks apply customer’s payments over and above the minimum required payment. While many card issuers currently apply the entire amount to the balance with the lowest interest rate, costing consumers significantly more, the proposal suggests that banks be forbidden to apply the payment in such a manner.

Banking industry officials are protesting the provisions, but consumer advocates say that the changes are desperately needed, particularly in the current economic climate. Borrowers who have significant debt are often unable to make their payments in a recession.

Those concerned by the proposed reform suggest that the changes will simply result in the banks evaluating everyone at one level, essentially the lowest common denominator. This means that even good credit risks will likely pay higher interest rates than in the past, as banks work to avoid decreasing profit. Banks have also indicated that the changes could force them to limit the number of accounts they provide, meaning less credit available to consumers.

Consumer advocates counter the concerns by pointing out that the banks will still have considerable leverage in their dealings with consumers. They will be more than able to increase interest rates on anyone who shows increased credit risk by being more than 30 days overdue with their payments and on future balances incurred by consumers. Speaking on measures still available to the banks, Travis Plunkett of the Consumer Federation of America says, “They can cut my credit line, they can freeze my credit line, they can tell me going forward that my interest rate is doubled or tripled.” Consumer advocates also feel the proposal fell short as it didn’t address a concern about overly aggressive marketing campaigns, nor does it address the overdraft fee issue appropriately.

One final contentious issue is that of the time frame for implementing the changes. Consumer advocates feel that a 180 day period should be adequate, while banking representatives indicate that they need at a minimum one year to change their practices.

Several members of Congress made bill proposals earlier this year that would have been more stringent than the Fed’s proposal. All indicate that they plan to make similar proposals in 2009.

Ira Rheingold, the executive director and general counsel of the National Association of Consumer Advocates says, “I think we’d be kidding ourselves if we thought this is the final word on credit cards. This is a good first step. But there’s a way to go before we properly regulate credit in our society.”