The movement to stem rising credit card interest rates gained new momentum on Wednesday this week, as the House voted to move up the effective date of key provisions of the new Credit CARD Act, which limit card issuers’ ability to raise interest rates retroactively.
The 331-92 vote comes in response to mounting consumer complaints about aggressive interest rate hikes, which have threatened to undermine the effectiveness of some of the more important consumer protections included in the new credit card law.
When Congress passed the law in May, it gave credit card companies nine month to comply with the new law in order to make the necessary changes to their systems. Lawmakers have been angered by the fact that card issuers instead appear to have used that time to focus on hiking cardholders’ interest rates, decrease credit limits, and increase fees. Consumers have complained of interest rate increases as high as 29.99%, even for cardholders who always pay on time.
The House vote moves the effective date of the new limitations on credit card interest increases up to December 1. The new provisions include curbs on card issuers’ ability to increase interest rates on existing balances, and further protect consumers from hair-trigger rate changes for small infractions like sending in one late payment. The bill was sponsored by House Financial Services Chairman Barney Frank (D., Mass.) and Rep. Carolyn Maloney (D., N.Y.).
If a similar bill is passed in the Senate and signed into law by the President, it would move up the enactment of most of the remaining provisions of the credit card law. While a few of the new provisions went into effect in August, the key provisions were scheduled for February 22, 2010, and a few are due to step in effect next August.
The Senate has a similar legislation on the table, introduced by Senate Banking Committee Chairman Christopher Dodd (D., CT). Dodd proposed to freeze rates on existing credit card balances until the new law steps into effect. However, no vote has been scheduled in the Senate on the proposed legislation.
The accelerated implementation of the new law has been opposed by Federal Reserve Chair Ben S. Bernanke. In an October 20 letter Bernanke warned that failing to give banks enough time to comply with the new provisions could result in “unintended consequences.” In response to Bernanke’s concerns, the law passed in the House exempts companies with 2 million cardholders or less from the December 1 effective date and allows them to comply by the original February 22 deadline.
Credit card issuers all along have maintained that they are raising interest rates to shore up losses in the face of rising credit card defaults and delinquencies. The majority of the U.S. credit card market is dominated by eight card issuers, including JP Morgan Chase, Bank of America, and Citigroup, all of which have been facing default rates in the range of 8 to 14% over the past six months.
The House bill was strongly opposed by the American Banker’s Association, which in response to the new bill issued a statement saying that accelerating the timeframe for implementation of the CARD Act would be extremely difficult for card issuers and would only serve to further restrict access to credit for both consumers and small businesses.
While the new law puts limits on card issuers’ ability to raise interest rates retroactively, credit card companies will still have plenty of latitude to increase interest rates on future charges, even when the new law becomes fully effective.
