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Credit Card Industry vs. Consumers: Who's to Blame for Strict New Rules?

Tuesday, 21 Apr 2009 | 9:26 PM ET

The run-up to Thursday’s historic credit card meeting between top banks and President Obama continues. The President will sit down with 14 executives from Citi, Chase and other top lenders to talk about the outbreak of surprise interest rate hikes and fees the industry is pushing to contend with the economic downturn.

It’s no surprise that cardholders are feeling cheated, as many are hit with fees, rate hikes and lowered credit limits despite doing nothing wrong themselves. A Pew survey found that of 400 credit cards offered online, 93 percent of them allowed for rate increases through changing the card agreements and 87 percent of issuers could hike rates even when accounts were less than 30 days late – uncharted territory in the history of the credit-card business and its relationship with consumers.

Your Daily Money
John Ulzheimer, of Credit.com; Nessa Feddis, of the American Banker's Association; and Carmen Wong Ulrich answer viewers personal finance questions.

Nessa Feddis, vice president and senior counsel for the American Banker’s Association, defended the credit card companies on Tuesday’s show by saying that, in most cases, when consumers get the notice that their interest rates have gone up they have the option to decline and pay off their balance at the original rate over time and then move to a different card. And the thought that lowering limits or closing accounts negatively impacts peoples’ credit scores is “exaggerated,” according to Feddis.

She says that banks are in a tough economic position and are making these decisions based on whether they expect to be repaid by consumers and at the cost of maintaining inactive accounts. Banks do not control the impact of consumers' credit scores, either.

That’s a statement that John Ulzheimer, our resident credit expert and consumer advocate, finds hard to believe.

The bottom line, according to Feddis, is that we’re all less creditworthy than we were a year ago. Credit cards are the riskiest type of credit that’s offered, and when that is compounded with one of the riskiest economies in generations, the companies need to do what is in their best interest to protect their business and shareholders. The dire economic picture and the wave of job losses has meant more people are unable to pay their card balances – those losses mean costs to the credit card companies increase and they have to pass that along in the form of higher interest rates for some. Additionally, investors who lend banks and credit card companies money are either lending less because of the increased potential for losses or demanding higher rates of return to compensate for the higher risk. It’s a vicious circle that’s at the heart of the financial crisis and could easily continue until the market and economy both rebound and credit loosens.

Until then, consumers can look forward to two important pieces of credit card regulation. The first, termed the Credit Cardholder’s Bill of Rights, is set to take effect in July 2010 and offers protection to consumers by extending the time given to pay bills, providing 45-day notice of an interest rate increase (unless you are more than 30 days rate of have a variable rate card) among other things. There’s also a bill making its way through Congress originally introduced by Senator Chris Dodd (D-CT), known as the C.A.R.D. Act, that strengthens regulation and supervision of the industry by preventing “anytime” interest rate increases, allowing consumers to opt-out, prohibiting issuers from setting early morning deadline for payments and more.

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