Senate Holds Hearing On Credit Card Practices
A Senate subcommittee this morning opened it’s first hearing on credit card practices.
In response to growing pressure from U.S. lawmakers, some credit card companies said Wednesday they are trying to do a better job of explaining fees and charges to consumers.
The panel, led by Michigan Democrat Carl Levin, is looking into industry practices he described as predatory in nature and confusing to consumers.
Levin held out the possibility of crafting legislation that would force credit card companies to end abusive practices and require regulators to improve disclosure rules.
“Our investigation found that even accounts in good standing are socked unfairly by little known … practices that inflate interest charges for millions of consumers,” Levin said.
Richard Srednicki, chief executive of the card services division at JPMorgan Chase & Co.’s (Charts) Chase Bank USA, said his firm is not waiting for new regulations. “We are taking our own proactive steps to help improve the clarity of information we share with our clients now,” he told lawmakers.
Last week, Citigroup (Charts), the third-largest U.S. credit card issuer, said it will no longer automatically raise interest rates for cardholders who fail to make payments on other bills. Known as “universal default,” the practice has long been criticized by consumer advocates who argue that it victimizes poorer borrowers.
“We eliminated the practice altogether for all customers during the term of their card,” said Vikram Atal, CEO of Citi Cards.
Sen. Norm Coleman of Minnesota, the top Republican on the subcommittee, said Citigroup’s recent move was encouraging.
He also praised Chase for eliminating a practice known as double-cycle billing which includes tacking on fees by calculating the fees you owe on your current balance and your balance from the month prior.
So, for example, if a credit card holder has a balance of $5,020 one month and repays $5,000 on time, the customer could owe $55.21 in the next billing cycle, based on an interest rate of 17.99 percent. That new balance includes 43 cents of interest from the $20 balance. But it also includes another $34.78 in interest that was based on the original amount of $5,020 even though $5,000 was paid on time.
Another industry practice the senators called “trailing interest” would add an extra interest charge of 38 cents even if a customer pays off the $55.21 balance on time.
Such practices are not illegal, but “do raise concerns,” Coleman said.
The credit card industry has more than 640 million credit cards in circulation. A recent report from the Government Accountability Office estimated that about 70 percent of the credit card industry’s revenue comes from interest and penalty rates, with penalty rates accounting for a growing portion.
Finally there is something being done about this.