All eyes are on Congress this week as it considers the proposal for a massive $700 billion bailout of Wall Street. Hitting closer to home for most people, however, could be the landmark credit card reform passed yesterday by the House of Representatives. The Credit Cardholders’ Bill of Rights Act contains a number of important protections for consumers to keep them from getting into too much credit card debt. This marks the first time that either chamber of Congress has ever passed legislation restricting the practices of the credit card industry.
Had similar basic protections been in place for mortgages eight years ago, consumers may have had a better understanding of how their mortgages worked and been less likely to default, possibly reducing much of the sting of this financial crisis.
While falling home values and bad mortgages underlie the overwhelming majority of the losses to the financial system, the damage does not stop with mortgages. An analysis by Moody’s Economy.com finds that losses on consumer loans, which include both vehicle and credit card loans made through the end of 2007, will amount to $100 billion. The Credit Cardholders’ Bill of Rights Act, if passed by the Senate and enacted, would ensure that basic consumer protections are in place so that borrowers in the future can avoid default by having a better understanding of the credit cards they’re using. These important steps could help avert a deepening of the credit crisis.
The bill addresses several of the practices that hurt consumers the most. Currently credit card issuers can raise rates for cardholders and apply the new rates to pre-existing balances—effectively raising the rate retroactively on debt incurred in the past. The bill would prohibit this practice with exceptions for when the borrower is more than 30 days late with a payment, has a promotional rate that ends, or agreed to a variable rate in advance.
Another practice of card issuers has affected cardholders with multiple balances at different rates. The card issuers have applied consumer payments first to the lowest-rate balances—thus keeping as much of the balance in higher rate debts as possible. The bill requires that consumers’ payments be allocated among these rates in a way that is more beneficial to the consumer. The bill would also more clearly define when a payment is considered “late” to give consumers reasonable time to make payments.
These reforms couldn’t have come at a better time for consumers. The mortgage bust has tightened lending standards for home equity. Americans who once turned to that equity to help them cope with rising prices for everyday goods have instead turned to credit cards, which are an expensive way of borrowing because of their higher rates and myriad fees.
The Federal Reserve is considering a similar, although weaker, proposal on credit card reforms that will likely be finalized by the end of the year. While it is unlikely that the Senate will take up the Credit Cardholders’ Bill of Rights before the end of this legislative year, Congress has made clear that it expects the Fed not to weaken its proposal further.
For more on the Center’s housing analysis and policy recommendations please see our Housing page, and for our analysis and recommendations on credit cards please see our credit and debt page.