California Credit Law Blog

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 ("CARD" Act) goes fully into effect in February 2010. If you want to find out which credit card issuers are complying with CARD at this time, go to www.billshrink.com. You can write in the name of your bank and find out to what extent the bank is in compliance. The major credit card banks are in compliance on some, but not all of the CARD requirements. The site neatly summarizes the ten major protections afforded cardholders. They are protection from arbitrary rate increases through early notification, the right to have interest rates reviewed to see if they should be lowered, payments must be applied to the most expensive balances first, a ban on universal default, a ban on "double-billing," no extra fees for paying by mail, by phone or online, payments received by 5 PM must be credited that day, cardholders must get 21 days from the date the statement is mailed to pay, banks are to provide warnings against paying only the minimum payments, and no marketing to kids without parents' OK.

The Minnesota Attorney General sued the National Arbitration Forum alleging it was essentially a front for various large banks and collection agencies. NAF falsely held itself it out to be a neutral forum for processing creditors' claims against consumers.

On July 19, 2009, the AG announced that NAF has entered into a settlement of the lawsuit under which NAF will immediately stop accepting consumer arbitrations of any sort. This is wonderful news for consumers and a major step towards getting rid of all mandatory arbitration clauses in consumer contracts.

A report by the Pew Charitable Trusts found that most credit cards include “unfair and deceptive” practices as measured by new Federal Reserve guidelines that go into effect in 2010. Reviewing consumer credit cards issued by the 12 largest companies that represent 88% of outstanding credit card debt, the study found:

• 100 percent of cards allowed the issuer to apply payments in a manner which, according to the Federal Reserve, is likely to cause substantial monetary injury to consumers.
• 93 percent of cards allowed the issuer to raise any interest rate at any time by changing the account agreement.
• 87 percent of cards allowed the issuer to impose automatic penalty interest rate increases on all balances, even if the account is not 30 days or more past due. The median allowable penalty interest rate was 27.99 percent per year.
• 72 percent of cards included offers of low promotional rates which issuers could revoke after a single late payment.

The authors of the study call for legislation to ensure that cardholders are charged only the interest rates they agreed to pay; fees are imposed responsibly and in a transparent fashion; cardholders have sufficient time to review and pay their bills; and interest is not charged on balances cardholders have already paid.

Charging too much on your credit cards is a good way to get into financial trouble. So, in this economic climate, it's best to keep those cards in your wallet, right? According to an article in MSN Money, not necessarily so.

Banks are apparently taking a hard look at customers who don't use their credit cards -- or who don't use them anough -- and simply canceling those cards. The banks reason that closing rarely-used accounts lowers their risk profile, because getting rid of unused accounts limits the bank's liabilities (potential available credit) compared to the bank's assets. Also, simply maintaining those accounts is an expense. But closing an account also means that the customer's available credit is reduced. You may not need that credit, but your credit score can take a big hit when an account is closed.

Credit scores are based on a complex formula. According to Craig Watts, spokesperson for Fair, Isaac, about 30% of your score is based on your credit utilization ratio -- the amount of your debt in relation to the amount of your available credit. Watts says a person with a solid credit score of 720, for example, whose utilization ratio increases from 35% to 75% after a bank closes an account is likely to see her credit score plummet by several dozen points. The resulting score would be far less than the 760 (or higher) consumers now need to get the best rates from lenders. (See Mark Anderson's January 6 post.)

The ironic conclusion is that credit may become more expensive for the consumer who thought she was being responsible by not using her credit card!

Capital One Bank and the credit reporting agencies (Equifax, Experian and TransUnion) recently settled with our client who was the victim of identity theft. It took years for the identity theft victim to get Capital One to stop trying to collect on the account it opened for an imposter.

The story began when Capital One sent a pre-approved credit card application to our client at her former college apartment. Someone in the building got the application from the mail and used it to get a VISA card from Capital One in our client's name. The imposter took $500 from the account, but Capital One quickly learned the account was fraudulent--a law enforcement agency told it that professional identity thieves had opened the account--so it closed the account and charged off the account balance.

That should have ended the matter, but it didn't. A year later, Capital One sent another credit card application to our client at the same old address. The imposter again used the application to apply for credit in our client's name and again Capital One issued the imposter a VISA card. This time it gave the imposter a $20,000 credit line and sent "convenience" checks that the imposter used to withdraw almost $18,000. When the imposter failed to make the payments, Capital One located and began to dun our client. She disputed the account, retained a different lawyer, wrote lots of letters. Nothing worked. Capital One sued her to collect on the account.

Then she contacted us.

Continue reading "Capital One Settles With Identity Theft Victim" »

In an interview on NPR's Fresh Air with Terry Gross, Prof Elizabeth Warren warns consumers that banks are increasing interest rates and fees on credit cards for no other reason other than that they need revenue to make up for losses in other lines of their business. The banks reason that in a climate in which credit is harder to obtain, consumers are less likely to close their accounts when hit with these increases and switch to different credit cards. Banks are also adding such "trips and traps" as double cycle billing (you pay interest on recent charges).

Banks are also pushing credit related products that Prof Warren calls lousy. An example is credit insurance on your credit card, which kicks in if you lose your job. Many buyers will be misled into believing the insurance pays off their balances, but instead the insurance merely pays the interest for six months. At $20 per month on, say a $5,000 balance, this is a bad deal for the consumer.

Prof Warren is a law professor at the Harvard Law School and a leading critic of banks' predatory lending practices. The interview is available as a podcast on NPR's website, www.npr.org.

Credit card companies love to market cards to college students. That point was eloquently and tragically made in the superb recent film Maxed Out. In the film, two mothers of college students describe how their bright and high-achieving children applied for credit cards as college freshmen. But they soon found themselves in serious credit card debt. Feeling profoundly depressed and overwhelmed, each of them committed suicide. These two moms have since made it their mission to stop credit card solicitation at college campuses.

A new BusinessWeek article tells the tragedy from a student's perspective. Ryan Rhoades, a freshman at the University of Pittsburgh, needed spending money. Citibank was offering jobs to college students to sign up new credit card users for $5 to $10 per application. Rhoades took the job. Citibank didn't tell Rhoades that the school had barred marketers from dormitories by then. So Rhoades marched right through the dorms and signed up about 30 of his fellow students.

Many college campuses have realized how dangerous on-campus credit card solicitation can be, and have accordingly banned solicitation on campus. But according to the article, "despite colleges' best intentions, the companies just set up shop across the street," says Linda Sherry, the director of national priorities for Consumer Action, a San Francisco consumer-education and advocacy group. "Students are constantly under attack."

The tragedy Rhoades tells isn't just that he "pushed" credit cards to unsophisticated students who had no idea how to handle credit--which Citibank said would be easily handled because students could easily pay off the balance once they graduated and got a great job. Five years later, Rhoades is still struggling with $13,000 of credit card debt--the "pusher" fell victim to the come-on himself .

Credit card companies are endorsing the Federal Reserve Board's proposal to mandate better disclosure of credit card terms to consumers, apparently hoping that more disclosure will head off Congressional attempts to outlaw some of the practices consumers complain about the most.

Kathleen Day of the Washington Post has been following the dynamic between some lawmakers' attempts to prohibit some of the worst industry practices and the Federal Reserve's proposal to disclose those practices but keep them legal. As Kathleen Day's article (discussed above in Mark Anderson's May 27 post) points out, some of the worst industry practices include "universal default," in which a consumer's interest rate on all his credit cards is raised if one of his payment is late; and "risk-based pricing," in which companies reserve the right to raise a consumer's credit card interest rate at any time, for any reason.

The proposed new rules would require a 45-day notice before credit card terms could be changed, instead of the current 15 days. They would also require companies to apply consumers' payments to the debt carrying the highest interest rate, not the lowest, as many companies do now.

Consumer advocates complain that the Federal Reserve's proposed rule changes don't eliminate some of the common abusive practices that only Congress can stop; they only provide better disclosure about what those practices are.

The Sunday May 27, 2007, edition of the Washington Post contains an article entitled "A Highly Charged Relationship" about Americans' love hate relationship with credit cards. What what we all love is the convenience, but we hate are the practices hidden in the fine print such as unfairly high interest rates and penalty fees; confusing policies that constantly change, almost always in the lender's favor; and near-insurmountable hurdles to getting help when a consumer falls into trouble or when a company makes a billing mistake.

The article states that most complaints involve "over limit" fees and penalties; interest charges on the whole debt even when part of it has been paid; billing errors (in the case discussed, Capitol One harassed a dad mourning the death of a son who had left a debt of $217 - - Capitol One erroneously insisted that the debt was more than 6 times greater); refusal to work with credit counselors who are trying to help the card holder; "workout plans" that don't reduce the consumer's debt; and "due dates" on days when it is literally or effectively impossible to make payment (here, the consumer paid in person at the bank on Saturday, in advance of the Sunday due date - - a date on which it was impossible to pay - - but since Saturday payments are not credited until the next business day, the consumer got hit with a late charge).

For the complete article, go the Washington Post website and search for the article by Kathleen Day.

You can get rid of unwanted credit card offers in the mail. Go to their website, which is the direct mail marketers site. Go to consumer assistance; once you have registered (it costs $1), you are protected for five years. It takes a few months, but the unsolicited mailings should stop. Reducing this type of mail reduces the chances someone will steal the mail and apply for credit in your name.

Maxed Out, an illuminating new documentary film about how the credit industry takes advantage of vulnerable consumers, arrives in theaters tomorrow. I had a chance to preview this film by director James Scurlock in November and was blown away. I highly recommend it to anyone who uses credit or credit cards at all.

In 1979, when I graduated from law school--with a great job--it took three tries before I could get a VISA card. The film demonstrates just how much has changed since then. Now creditors are luring college students into applying for credit cards as soon as they leave home. Many of these students find themselves deep into debt in just a few years. The film tragically documents two college students' suicides, as told by the students' grieving mothers, after they found themselves desperately in over their heads.

The film also explains why big banks don't discourage people from using credit that they can't afford--marginal borrowers are often the core of their profits.

Even worse, since many of our elected representatives have close ties to the banking industry, they actually encourage financial institution's predatory behavior.

Unless you keep all your money under a mattress and never use credit, I encourage you to see this film. You'll never look at credit the same way again.