Congress to Credit Industry: No More Card Tricks

There may not be immediate results from lawmakers' attempts to stem foreclosures or unemployment, but there could be a direct impact from their focus on another populist cause: cracking down on credit card companies.

That's exactly what they did. By a vote of 361 to 64, the House passed a bill last week that restricts practices that lawmakers, consumer advocates, and the Federal Reserve alike have called "unfair," from charging interest on debt paid on time to increasing rates arbitrarily. President Barack Obama signed the bill May 22 in a Rose Garden ceremony. "We don't begrudge a company's success when that success is based on honest dealings with consumers," Obama said in New Mexico last week. "But some of these dealings are not honest."

Of course, not everyone agrees. Credit card companies are balking at what they see as a restriction on their ability to base pricing on risk. The effect, they say, could be to tighten credit, not make it more available. Meanwhile, some experts warn that companies might turn to practices that seem more egalitarian but harm even perfect customers in order to increase revenue, like cutting rewards programs or reviving annual fees.

But for many Americans, nearly half of whom carry a balance on their cards and 1 in 5 of whom has an interest rate above 20 percent on the amount owed, current practices seem underhanded. One thing that the legislation will end is "universal default," in which the credit card issuer can raise the interest rate on a cardholder's existing balance when he or she is late on an unrelated payment of any amount. The bill also prohibits "double-cycle billing," in which companies charge interest based on the average daily balance of two months of debt, even if the first month has been paid off.

Double-cycle billing and some of the other questionable practices were prohibited by the Federal Reserve in December. But those rules don't go into effect until July 2010. The bill calls for the new law to be enacted nine months after the president signs it.

And the legislation goes further than the Federal Reserve regulations. It mandates more transparency, requiring, for instance, that companies disclose how long it will take to pay a debt if only the minimum payment is made each month. In addition, the bill requires penalty fees to be "reasonable and proportional." The vagueness of that provision particularly worries the industry, says Peter Garuccio, spokesperson for the American Bankers Association, who says it could be "a toe in the door of price controls."

But advocates argue that the legislation doesn't have to be detrimental to credit card companies. "This legislation resets the playing field. It has eliminated a lot of the incentives that exist in the market today to be deceptive," says Nick Bourke, project manager of the Pew Safe Credit Cards Project.

It's still too early to tell how companies will respond. But, faced with their new mandate from Congress and the public, it seems likely that the companies will have to do more than simply change some practices. It also means a fundamental change in their business model and in how they treat their customers.