Credit Cards

In May 2009 Congress passed and the President signed a new law to reform the credit card industry.  AFFIL members and consumers from around the country convinced Congress and other decision-makers that this reform was essential.  After a nine-month delay, almost all features of the law become effective on February 22, 2010.

The new law:

• Bans "any time for any reason" and "universal default" increases on existing balances.  Companies will only be able to raise the  interest rate on your existing balance if you pay more than 60 days late.  Furthermore, this "penalty rate" must be reduced to the previous level after six months of on-time payments.  (They will still be able to raise the interest rate on your future purchases or transfers.)
• Prohibits interest rate hikes during the first year of your contract and require that any low promotional or "teaser" rates remain in effect for at least six months
• Requires any payment you make above the minimum go first to the balance with the highest interest - helping you to pay down debt more quickly
• Gives you 45-day notice for a rate increase on future purchases and give you adequate time to pay off your existing balance at the old rate if you decide to close your account rather than accept the increase
• Eliminates late bill mailings, Sunday due dates, and other tricks that result in late payment penalties
• Prohibits overlimit fees for approved transactions unless you have asked for this feature on your account
• Requires that "penalty" fees be reasonable and proportional to the company's costs, and that any "penalty" interest rate be reduced to previous level after six months of on-time payments.  (This provision does not go into effect until August 2010.)
• Bans double-cycle billing
• Protects young consumers from debt by requiring that no one under 21 be given a credit card unless either they have a co-signer over 21, or can demonstrate independent ability to repay
• Restricts aggressive marketing of credit to college students
• Restricts fees on "fee harvester" subprime cards.

What's missing?  The new law does not restrict the level of interest rates or the size of the rate increases that are allowed.   It is silent on the industry practice of reducing credit limits at any time for any reason, and it does nothing to ban forced arbitration clauses in every credit card agreements.

Read More:

• Credit Card Facts and Stats, including Credit Card Debt by State

• The History of Credit Card Deregulation

• The Differences between Credit and Debit Cards

• College Students are Industry Targets - Warn Them with this Video!

• Sources for more information

Credit Card Facts and Stats

• Americans owed over $850 billion in credit card debt at the end of 2009, down from $950 billion one year earlier.

• As of 2007, the average credit card debt per household was $7,430, and the average credit card debt for households who carry a balance was $17,103.

• Low- and middle-income households have an average of $8,650 in credit card debt.

• The total amount of credit made available by issuers in 2007 was about $5 trillion, or $43,007 per household.

The Credit Card Industry

• The industry is dominated by a few major players.  Just six companies - Bank of America, JPMorgan Chase, Citigroup, Capital One, Discover, and American Express - account for about 90% of all credit card debt.

• Credit card companies collected  $115 billion in revenue in 2006, about two-thirds from interest payments, one-fifth from fees paid by merchants who accept the cards, and about 15% from consumer fees.   Profits were $18 billion.

• Banks specializing in credit cards were for many years much more profitable than banks in general.  According to FDIC data for 2007, for example, the return on equity (a fancy name for profit rate) was 15.1% for credit card banks, compared to 8.2% for all banks.  In the current economic downturn, however, this is no longer true – the FDIC reports that credit card banks return on equity was negative 2.5% in the first three quarters of 2009, compared to positive 0.9% for all banks. 

College Students and Credit Cards

• In 2008, 84% of undergraduates had at least one credit card, up from 76% of undergraduates in 2004.  The average number of credit cards per student has grown to 4.6.

• In 2008, the average balance on undergraduate credit cards was $3,173, up from $2,169 in 2004.  The average senior graduated with $4,100 in debt.

• Nearly one-third (30%) of all students put tuition on their credit cards in 2008, up from 24% in 2004.  When asked why they were charging tuition to their credit cards, 31% of students surveyed said they did so because they didn't have enough savings or financial aid to pay for their educational expenses.

• Only 17% of undergraduate students in 2008 paid off all credit card balances each month.  Seven percent (7%) admitted to paying less than the minimum each month.  More than three-quarters of all undergraduates make the minimum required payments while incurring penalty charges and rate increases, making it much harder for them to get out of debt.

• Eighty-four percent of undergrauates in 2008 indicated that they needed more education in financial management.  Sixty-four percent (64%) would have liked to receive financial education in High School, and 40% would have liked to receive financial education during their freshman year of college.

People of Color

• Eighty-four percent of African American credit cardholders carry a credit card balance, compared to 75% of Hispanics and 51% of whites.  This makes people of color more vulnerable to arbitrary interest rate increases and other industry profit-boosting tactics.

Credit Card Debt:  Where does your state rank?

(February 18, 2010) What is the median amount of credit card debt per borrower in your state?  Find out below! 

This table shows the median amount of revolving debt per borrower in each state as of 2008.  Revolving debt is largely comprised of credit card debt (95%), and also includes private label cards and lines of credit.  Our Partner CFED acquired the data from TransUnion, a credit reporting agency, as part of their Assets and Opportunities Score Cards.

Credit cards weren’t always unregulated.  Until 1978, most  states had usury laws that capped interest rates and fees, usually at 18 percent APR or less. 

But in 1978, the Supreme Court ruled that when a national bank located in one state has credit card customers in another state, the interest cap is determined by the laws of the bank’s home state.  Later, a second ruling applied the same reasoning to fees as well.

Major banks quickly moved their credit card operations states like South Dakota and Delaware, where there were no limits on rates, and states lost the ability to protect their own residents from credit card abuses.

This in itself would not have been a serious problem, if the federal government had stepped into the gap with meaningful regulation of the industry.  But until the Credit CARD Act of 2009 was passed, there was no federal regulation of the credit card business, except for relatively weak disclosure requirements (they can do anything they wanted, as long as they told you about it – usually in the fine print).

More information about credit cards

Studies, reports, and more data about credit cards