Before the Memorial Day weekend began, President Obama signed into law a bill that supporters say will protect debt-ridden students and other consumers from credit card companies that use unfair lending and billing practices.
The aptly named Credit Card Accountability, Responsibility and Disclosure (CARD) Act will go into effect in nine months and represents a sweeping change to the way credit card companies do business.
Under the legislation, companies would be prohibited from issuing cards to people under the age of 21, unless they either have a co-signer or can demonstrate an ability to repay the debts on their own. It also caps the amount students under the age of 21 could borrow at $500 or 20 percent of their annual income, whichever was greater.
For all cardholders, the law will place strict limits on the methods credit card companies can use to earn profits off of their customers. Among the law’s highlights are:
Limits on interest rate hikes (including those raised as a result of late payments).Clearer due dates and times for card paymentsMore time to pay monthly billsLimits on fees for going over the credit limitGreater advance notice of changes in credit card terms and rates.
The law is especially relevant to college students. A recent study by U.S. PIRG, called the “Campus Credit Card Trap Report,” confirms that students are using credit cards in significant numbers and that a large number are paying the price through late fees, high balances and delinquencies.
Nearly two out of three students reported having at least one credit card, and college seniors who paid their own credit card bills reported debts of $2,623 in 2007, the study said.
Edmund Mierzwinski, consumer program director of PIRG, said this law was a welcome and long-awaited change.
“The credit card companies have become more and more about cheating customers,” Mierzwinski said. “They began to develop a business model based on ‘gotcha fees,‘ including raising the interest rates when you are a minute late. This bill would prevent the companies from tricking customers, including the good customers, into paying late.“
However, not all are excited about the proposed regulations. There is concern that it will make credit cards more expensive and harder to get for all consumers in general.
Edward L. Yingling, president and C.E.O. of the American Bankers‘ Association (ABA) said this law will hurt the ability for lending banks to lend, and charge, according to the risk of the consumer.
“The result – more risk and less ability to distinguish according to risk – will result in less credit available generally,” Yingling said in a statement. “This means some consumers and small businesses will not be able to credit cards at all; others will have smaller credit lines.“
Yingling said that as a result, in some cases higher interest rates and annual fees will be needed to cover the overall increased risk, as companies will no longer be able to distinguish between good customers and bad customers.
Yingling also expressed concern that placing these limitations on credit card companies would make it difficult for students to obtain and build credit, and to be able to pay for expensive student loans, despite the debt it burdens them with.
Mierzwinski said he does not think the new law will jeopardize students‘ abilities to obtain credit cards.
“Students who were able to get a card and pay their bills will not be affected,” Mierzwinski said. “They will continue to be able to do so. I think the banks are using that argument as their whipping boy.“
He added that students and other consumers under the age of 21 will now have to meet the same requirements that he or any adult does.
“If I need a credit card, I need to show that I can pay like anyone else, or to get it cosigned,” he said.
The CARD Act also aims to restrict the practices of credit card companies who target high-risk students through attractive on-campus marketing campaigns. Many universities and colleges have come under criticism for making financial contracts with credit card companies, allowing them access to exhaustive student lists and alumni organizations for sometimes lucrative deals.
“Companies market directly to students through the mail, over the phone, on bulletin boards and through aggressive on-campus and ‘near-campus‘ tabling – facilitated by gifts such as free T-shirts,” the PIRG study said.
The new law would not prohibit these contracts but it would make them more transparent, requiring creditors to release annual reports regarding their relationships with colleges, alumni organizations or affiliated organizations.
Chuck Kratochkil, director of Bookstores at UC Davis, has overseen campus policy about credit card marketing for decades.
“Over the last 20 years we have gone from curtailing this marketing, to almost completely banning it,” Kratochkil said. “Our policy is so restrictive that we basically don’t have any kind of marketers on campus, except for the occasional rogue card marketer.“
TOM MORRIS can be reached at firstname.lastname@example.org.