New credit card law does not address the problem of high interest rates

Amid all the glowing reports and Obama’s teleprompter taking credit for credit card reform is one glaring deficiency of the new law; it says nothing about interest rates credit cards may charge.

One important element failed to survive the trip through Congress. The Senate rejected an amendment that would have capped the interest on credit cards. Putting a ceiling on interest and fees is something that should have been done and it wasn’t. Even the ridiculous cap Senator Richard Durbin (D-Ill.) proposed, capping total interest and finance charges at 36 percent, was shot down. The worst abusers of high interest charges are "payday loans" where, in exchange for a few days' advance in pay, borrowers often have to repay two or three times the amount of the loan.

A cap should apply to all consumer credit, from car loans to credit cards to mortgages, but we have no cap so lenders can charge whatever the traffic will bear; and those in need the most pay the highest.

Limiting interest rates isn't a radical concept. By 1886 every state had some interest rate cap in place. Most credit was local, and little changed until the 1950s, when banks started issuing credit cards. Banks didn’t like having to comply with so many low state caps which cut into their profit, so Banks in states that allowed higher rates began applying those rates to customers in other states where the caps were lower.

So how did it come to pass that state usury laws were bypassed – the U.S. Supreme Court ruled in a 1978 court case between Marquette National Bank of Minneapolis and First Omaha Service Corp. that the National Bank Act trumped state usury laws and allowed lenders to charge the highest interest rate permissible in their home state. Card companies moved their operations to states that repealed the caps and the era of usurious interest rates began.

To put this in perspective, the credit card industry made more than $15 billion in penalty fee income last year. What they did was to turn what use to be fees for penalties into really a profit center. How did they do that you might ask, well here are some typical credit rate charges I found on the internet:

Capital One 16.90%
Citi 14.24%
Master Card 14.99% or 21.99%
Visa 16.90%
Visa Vision $0.95 weekly
Visa New Millennium19.50%

How about that Visa New Millennium Card; $0.95% weekly works out to over 50 percent APR?

The American Bankers Association and other industry spokespeople argue that if they can’t charge 15 billion dollars of penalty fees, then they will have to charge that amount is some other way and “you don't want us to have to charge you some other way."

Credit card companies have made huge profits in recent years and a lot of those profits have come from deceptive practices; the new law will change some of that but charging ridiculously high interest rates on unpaid balances is not affected. Sure you can avoid paying high interest rates by not using credit cards but that is virtually impossible these days. Besides, this solution is like to avoid car jacking you shouldn’t have or drive a car.

It is generally assumed that when the Federal Reserve cuts interest rates that makes it cheaper for consumers to use credit cards. But credit card interest rates remain high and in many cases even climb. It isn’t true that higher interest rates only apply to customers who don’t pay on time, even some cardholders who pay on time have not benefited from lower interest rates charged by the Federal Reserve, according to analysts banks raise rates and fees to make up for losses in their mortgage departments.

For example, the annual percentage rate on Chase Business Visa cards in Fairfax County, Virginia, went from 8 percent to 24 percent in December, three months after the Fed's first rate cut.

Card companies say they are exercising their right to protect themselves from risky borrowers and market conditions but that’s nonsense; what they are doing is better described as protecting the huge $15 billion in profits they make from credit cards in penalties alone. Credit card profit helps banks deal with the sub prime mortgage problem but why should the burden fall on those of us who rely on credit cards in every-day transactions so large amounts of cash don’t need to be carried with us?

"Credit cards historically have been a very profitable segment for the banking industry, so what they're doing is trying to squeeze customers as much as they can, particularly for accounts they don't see as profitable or as high risk," said Curtis Arnold, founder of CardRatings.com, an independent consumer resource on credit cards.

Bank of America, for instance, notified some customers recently that their rates would increase as a result of a periodic review of their credit risk. Chase late last year increased the rate paid by new customers of its Freedom card. Bank of America and Chase are also among some banks that have increased ATM fees for other banks' customers to as much as $3 per visit. Capital One has raised its cash-advance fee for new customers from 19 percent to 23 percent.

One insurance agent said he called Chase when his rate skyrocketed on his balance of $4,500, which he said he was paying more than the minimum on time every month. The caller was told that he should have received a letter giving him the option to close the account if he did not want the new rate, he said. He did not recall seeing that letter. He wrote to the bank requesting that his previous rate be restored. Last month, he said, he received a letter from Chase notifying him that the account was closed.

A Tacoma Park, Maryland, resident has a Chase Visa credit card. In November, she said, she received a letter saying her 8.9 percent rate would rise to 21.24 percent.

Congress has been examining other industry practices such as increasing cardholders' rates for making late payments to other creditors or decreasing their limits, which hurts their credit scores by increasing the percentage of the available credit they have used.

Recently Congresswoman Carolyn B. Maloney (D-N.Y.), chairman of the House financial institutions and consumer credit subcommittee, introduced the Credit Cardholders' Bill of Rights Act of 2008, which would, among other things, restrict fees and rate changes that companies could impose. We’ll wait and see if this bill goes anywhere but we shouldn’t hold our collective breadth; banks have enormous power in congress (or we wouldn’t have the Federal Reserve Act).

There are things Congress can do to address the unfairness of high credit card rates; for one thing they can pass a law to enable states to apply state usury laws to all business transactions occurring in their state. That would be the best solution; however here are some additional minimum changes congress should enact:

1. Prohibit universal default in most circumstances (a credit card company can increase your rate, if you paid another card late, even if you’ve always paid their card on time).

2. Prevent credit card issuers from changing the terms of a credit card contract as long as the holder remains current on payments.

3. Freeze interest rates and fees on canceled cards so you can pay off your balance at your current rate.

4. Prohibit issuance of a credit card and certain affinity cards to anyone under age 21 unless certain requirements have been met.

5. Bar double-cycle billing, the practice of computing interest charges on outstanding balances from more than one billing cycle.

6. Increase the information disclosed to customers in monthly statements.

7. Require credit card statements to be mailed at least 21 days before the bill is due. This is a week more than what is currently mandated.

But to me it seems there is no reason for banks to be exempt from usury laws.