At this point, you may realize how burdensome credit card debt can affect your finances. According to a 2007 survey conducted by Cardweb.com, the average credit card debt load is nearly $9,900. Based on an online poll of slightly more than 55,000 consumers, 61% said they carry over debt each month on their credit cards and an astonishing 13% of the same group said they carry total credit card balances in excess of $25,000.
Recently, Senator Chris Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, introduced The Credit Card Accountability, Responsibility and Disclosure Act (C.A.R.D. Act), which is a proposed legislation that will target abusive practices in the credit card industry. Below are some specific aspects that this legislation intends to cover.
Eliminate universal default.
This practice involves raising rates when creditors detect a problem on your credit report with any lender. For example, you may have missed a payment with Credit Card A and have a perfect history with Credit Card B. Unfortunately, Credit Card B can still raise your interest rate due to a blemish on your credit report with the other lender. In 2007, Citibank was the first credit card company that put an end to universal default. Also, legislators outlawed this practice in the state of New York last summer. As you can see, progress is being made and perhaps universal default will not exist in the future due to the C.A.R.D. Act. Presently, a survey conducted by Consumer Action indicates that nearly half of U.S. banks use universal default, enabling them to legally raise credit cardholders’ interest rates as high as 40%.
Payments need to be allocated more fairly.
Oftentimes, consumers transfer balances because they are enticed by the low introductory rates such as 0% or 2.9%. Reading the fine print in the credit card agreement indicates that these rates, in most cases, only pertain to the transferred balance, not to new purchases. Credit card companies have been known to apply monthly payments only to the transferred balance, which results in more finance charges on the new purchases. The C.A.R.D. Act would establish fairer allocation system.
Ban excessive fees for sub-prime cards.
Some credit card companies target consumers with poor credit histories and offer them cards with astronomical interest rates and approval fees. Upon approval of the card, issuers commonly charge the fees on these new accounts. Therefore, you acquire a balance before you make any significant purchases. The C.A.R.D. Act would prohibit card companies from charging fees that amount to more than half of the credit line. Also, if the fees being charged to the card, amount to more than one-quarter of the credit line, cardholders would be allowed to pay these fees over a one-year period.
Enhance credit card disclosures and statements.
Reading the fine print of a credit card disclosure can be a tedious task. The average consumer may think it is easier to simply pay the minimum payment and wait until next month. The C.A.R.D. Act would require issuers to give consumers a clear estimate of how long it would take to pay off the balance and the amount of interest that would accrue if they only make the minimum payment each month. If a cardholder’s interest rate increases for any reason, this new legislation will also require lenders to give consumers a 45 day notice.
Other Credit Card Reforms Needed
Various consumer groups such as the National Consumer Law Center (NCLC) and Demos (www.demos.org) applaud the recent proposal of the C.A.R.D. Act. Below are a few other reforms that Congress is considering to put in the proposal as a result of input from consumers and advocacy groups.
Eliminate aggressive lending to young consumers:
Applicants under the age of 21 may be required to obtain a signature of a parent or guardian. Young people may have to provide proof that they completed a financial literacy course. Also, consumers under the age of 21 would have to choose to receive solicitations instead of having consumer reporting agencies automatically send them.
Outlaw repeat over-limit fees.
These fees are only allowed to be charged once during a billing period.
Limit penalty interest rates.
If a consumer fails to make a payment on time, issuers can only increase the interest rate to 7% above the previous rate.