Be in charge with new credit rules


POSTED: Sunday, May 24, 2009

Credit-card companies that for too long have taken advantage of their riskiest customers by jacking up interest rates and overly penalizing those late with payments should be brought under control by legislation that President Barack Obama has signed into law. The companies already have begun to take the risk of targeting their best customers to make up for their ill-gained revenue.

A bill approved overwhelmingly by the Senate and the House includes provisions authored by Sen. Daniel Akaka (D-Hawaii). Those provisions will require companies to inform cardholders about how long it will take to repay their entire balance by paying only the minimum amount or how much it will take to pay it off in three years and provide consumer access to trustworthy nonprofit counselors through a toll-free number.

The final bill goes far beyond those changes, which Akaka had introduced in the last Congress. It will restrict a company in when and how it can raise a cardholder's interest rate. It will protect cardholders from many of the surprise charges such as over-the-limit fees and costs for paying a bill by phone. The company must give the cardholder 45 days notice before raising rates. And people under 21 must prove they can repay what is owed or that a parent or guardian is willing to pay off the debt if needed.

The credit-card companies that used to charge a flat interest rate of 20 percent and an annual fee began straying from those policies after some states started to relax usury laws in the late 1980s. Cards began to be offered at various rates and fees tied to the credit risk of the cardholder.

Penalty fees for such things as late charges and exceeding credit limits grew by $1 billion annually in recent years and are expected to top $20 billion this year, according to industry consultant Robert Hammer.

Changing the way credit-card companies do business has caused them to eye “;on-time”; cardholders who routinely pay off their balance every month while benefiting from cash-back rewards and frequent-flier miles. “;Those that manage their credit well will in some degree subsidize those that have credit problems,”; said Edward L. Yingling, chief executive of the American Bankers Association, which lobbied for more lenient legislation.

About 50 million cardholders — one-third of credit-card customers — pay off their balance monthly. Those who have not paid annual fees can soon be expected to do so. At that point, they may want to consider whether paying the annual fee is worth the perks, or whether using a bank debit card is preferable — a movement that should give credit-card companies pause.