US comes to credit card users' rescue

A bill pending in the US Congress seeks to protect credit card users from sudden rate increases and fees. Industry groups say there will be unintended effects of the measure, especially for consumers who pay their bills in full and on time. Consumer advocates say it will give cardholders more control and prevent them from spiralling further into debt.

The bill, approved by a House of Representatives committee, requires 45 days' notice of interest rate increases, prohibits companies from changing the terms of the contract at any time for any reason, and makes issuers mail billing statements 25 days before the due date, instead of the current 14-day minimum.

"Less risky borrowers will have to absorb the costs posed by riskier borrowers if issuers can't price everyone based on the risk they pose," said Ken Clayton, senior vice-president of card policy at the American Bankers Association based in Washington, D.C.

Card applicants who are perceived to be high-risk because of low credit scores may no longer qualify if the legislation passes, Clayton said.

With declining home equity limiting access to credit, more Americans are relying on plastic. Consumer credit-card debt is nearing the $1 trillion mark, which is double the amount held in 1996, said Representative Carolyn Maloney, a New York Democrat who is sponsoring the bill, in an email. "Now more than ever, we need to end unfair and deceptive credit card lending practices that make it difficult for consumers to control their credit and manage their debt," said Maloney.

About 60 per cent of cardholders don't pay off their balances each month, said Ben Woolsey, director of marketing and consumer research at CreditCards.com.

Interest rates

The average interest rate charged on existing credit-card balances was 13.5 per cent, according to the Federal Reserve's June 19 report, which tracks rates for credit card accounts.

One of the most beneficial parts of the legislation requires issuers to apply payments proportionally, rather than just applying payments to the lowest rate so higher interest rates continue to accumulate a bigger balance, said Ruth Susswein, the deputy director of national priorities at Consumer Action, an advocacy group based in San Francisco.

The decline in second-quarter earnings by card companies may adversely affect cardholders, said Bill Hardekopf, chief executive officer of LowCards.com, a Web site that compares the rates of almost 1,300 credit cards.

"One way issuers may compensate is by being very quick to the trigger to increase rates, so if your credit score takes any kind of dip, they may increase your interest rates," Hardekopf said. Credit scores may take a hit from late payments or using more than half of your available credit.

Hardekopf, based in Birmingham, Alabama, suggested signing up for online credit card notices, so cardholders don't accidentally throw away a purposefully white unmarked envelope, which might contain important information about changes in rates or fees.

He also said consumers who pay their balances every month can take advantage of cards with a cash-back or rewards program. If they have available cash, cardholders with outstanding balances should debit their purchases because they will just make interest payments on the larger balance, Hardekopf said.

Debt rising

Credit-card debt per US household totalled $8,308 in 2007, up 7.2 per cent from the previous year, according to the Nilson Report, an industry newsletter based in California.

If cardholders are in danger of defaulting, they should call the card issuer and try to negotiate a lower interest rate or more amenable payment schedule, said Noreen Perrotta, money editor for Consumer Reports.