Credit Cards

In May 2009 Congress passed and the President signed a new law which will reform the credit card industry.  AFFIL members and consumers from around the country convinced Congress and other decision-makers that this reform was essential.  Most parts of the law are set to go into effect in February of 2010.

The new law will:

• Ban "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.  (They will still be able to raise the interest  rate on your future purchases or transfers)  
• Prohibit 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
• Require any payment you make above the minimum go first to the balance with the highest interest - helping you to pay down debt more quickly
• Give 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
• Eliminate late bill mailings, Sunday due dates, and other tricks that result in late payment penalties
• Prohibit overlimit fees for approved transactions unless you have asked for this feature on your account
• Require 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.
• Ban double-cycle billing
• Protect 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
• Restrict aggressive marketing of credit to college students
• Restrict 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 the forced arbitration clauses that are buried in almost every credit card agreement.

Read More:

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

• Common Credit Card Tricks and Traps

• 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 owe over $950 billion in credit card debt.

• 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.

• Even as the economy worsens, Americans continue to be inundated with offers of credit.  In 2008, issuers sent 4.2 billion credit card offers in the mail – down from the peak of 6.1 billion in 2005, but still nearly four times as many as the 1.1 billion sent in 1990.

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 have been much more profitable than banks in general.  According to FDIC data for 2007, the return on equity was 15.1% for credit card banks, compared to 8.2% 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?

(July 29, 2008) 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 2006.  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.

Watch Out For These Common Credit Card Tricks and Traps 

PDF Version of the Tricks and Traps

(July 11, 2008) Credit card contracts are packed with fine print tricks and traps to increase the likelihood of paying fees and penalties. You will be hard pressed to find a credit card without these terms – at least until our government outlaws them – but if you’re informed and cautious, you have a better chance of steering clear of the traps and saving money.

Fees and More Fees – On any given month, you might pay a late payment fee, overlimit fee, cash advance fee, balance transfer fee, foreign exchange fee, bill payment fee, Western Union fee, and whatever else your lender can devise. Not to mention monthly and annual fees.

Tricks to Make You Pay Late – These come in many varieties. If you’re late you’ll pay a hefty fee and your interest rate may go up. Check each statement carefully and pay your bill as soon as it arrives.

Changing Due Dates – Your bill will not be due on the same day every month.

Early Due Dates – Bills may be due just a few days after you receive them.

Weekend Due Dates – If your due date is on the weekend and your payment arrives on the date, it won’t be processed until Monday and you’ll be considered late.

Morning Due Times –Your payment may be due at 9am on the due date, not 5pm.

Approved Overlimit Charges – If a purchase puts you over your limit, your credit card company will approve the charge then hit you with an overlimit fee and maybe even raise your interest rate. Keep careful track of your balance and know that even approved charges may put you overlimit.

Universal Default – Pay Card A on time but pay late to Card B (or anything else monitored by your credit score) and your interest rate on Card A may jump!

“Any Time For Any Reason” Changes – Most contracts include this ominous phrase. It means just what it says – they can increase your interest rate on a whim.

Teaser Rates That Don’t Stick – An introductory 0% interest rate can jump to 30% with a late payment or if you go overlimit. Don’t bank on keeping that 0% rate for the entire promotional period.

Retroactive Application of Higher Interest Rates – To make things worse, if your interest rate increases, they can apply the higher interest rate to the entire existing balance, not just to new charges.

Allocation of Payments – If you end up with two or more different interest rates, they will apply your payments to the balance with the lower interest rate first. The rest of your balance will continue to generate high interest charges until the low-rate balance is entirely paid off.

Tricky Interest Calculations – For some cards, you can pay interest on purchases from previous cycles. This is known as double cycle billing. Look for a card that uses the “Average Daily Balance” interest calculation method.

Credit “Protection” – Services like this may sound good, but they’re usually useless. The fee for the service likely exceeds the minimum payments it would cover if you became sick or lost your job. Avoid add-on products like this.

Binding Mandatory Arbitration (BMA) – This provision requires that you resolve any conflict with an arbitrator selected by the lender, which means you give up your right to take the credit card company to court.

The History of Credit Card Deregulation

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 this day there has been no federal regulation of the credit card business, except for relatively weak disclosure requirements (they can do anything they want, as long as they have told you about it – usually in the fine print).

More information about credit cards

Studies, reports, and more data about credit cards