Abusive Credit Card Pratices Increase Despite Law

Virtually all credit cards offered online by major banks still include abusive practices that will be outlawed early next year, according to a new report from the Pew Charitable Trust.

In fact, the report found that many practices that will be banned this winter under the federal Credit CARD Act of 2008 have actually increased over the past year, and that credit card interest rates have risen even as the cost of lending declined.

"Since passage of the Credit CARD Act, we found that credit card issuers have done little to remove practices deemed unfair or deceptive by the Federal Reserve," said Shelley Hearne, managing director of the Pew Health Group. "In fact, some of the most harmful practices have actually grown more widespread-not one of the bank cards reviewed would meet the legal requirements outlined in the Credit CARD Act, which is bad news for consumers."

The report, by the Pew Health Group's Safe Cards project, found that 100 percent of the 400 bank-issued credit cards it studied used practices deemed "unfair or deceptive" by Federal Reserve guidelines and would not meet the requirements of the Credit CARD Act. The act was passed in May 2008 but its provisions do not take effect until February 2010 or later.

It was noted that 97.7 percent of bank-issued credit cards allow the lender to increase the interest rate on existing balances, up from 93 percent in December 2008. The report also found that 95 percent of bank-issued credit cards allow issuers to credit payments in a way deemed harmful to consumers, such as crediting payments in a way that maximizes interest costs, and 90 percent include penalty interest rate hikes incurred by "hair-trigger" provisions of one or more late payments in a year. All are practices targeted by the new law.

Median annual percentage rates (APRs) for bank-issued cards rose sharply in the first half of the year, even as the Federal Reserve took aggressive action to cut the cost of lending and mortgage interest rates fell to their lowest levels in at least half a century. The minimum rate advertised for bank-issued cards rose 20 percent from December 2008 to July 2009, the report said, while the highest advertised rates rose by 13 percent.

"Though the Federal Reserve has lowered the federal funds rate to historic lows to make it easier and less costly for banks to borrow money, credit cardholders have not experienced a corresponding benefit," the report said.

Credit union customers were found to benefit from significantly lower rates and penalties. Average interest rates on credit union-issued cards were found to run approximately 20 percent below those of comparable bank cards, with overlimit and late fee penalties about half those charged for bank cards. The median penalty interest rate on credit union cards was also about one-third lower than on bank cards and were more likely to terminate after three to 12 months.

"When the Credit CARD Act takes effect next year Americans can expect to see safer, more transparent cards," said Nick Bourke, manager of Pew's Safe Credit Cards Project. "How well the new law works, however, will depend significantly on how the Federal Reserve creates new rules under the law to protect consumers.

The report calls on the Federal Reserve and other regulators to ensure that rules being developed to implement the Credit CARD Act will place effective limits on penalty interest rates and feeds, and take a close look at variable interest rates, which can rise in relation to a benchmark fee but not fall below a minimum level.