Are Credit-Card Companies Cleaning Up Their Act?

This was a first. The 43-year-old computer consultant from Westford, Mass., had never been late with a payment in 25 years. He didn't use the Chase card much, charging $100 or so a month and always paying it in full as soon as he received the bill.

But in the past three months, Chase hadn't sent him one bill. Without McKenna's knowledge — or, he says, authorization — the bank had switched him to paperless billing back in June. Without a bill, McKenna says he simply didn't think he had a balance to pay off. "I have several credit cards," he explains. "It's hard to track what you charge on each. And if you don't charge anything, you typically don't get a bill."

That tiny omission has had disastrous consequences for McKenna's credit score. Once in the 800-plus range — a score typically only achieved after many years of impeccable payment history, according to Fair Isaac spokesman Craig Watts — McKenna's score has now slipped to 650, which many lenders consider subprime. (Chase told us they don't comment on individual cases for privacy concerns and didn't, by press time, comment on the bank's policy regarding paperless billing.)

There's very little McKenna can do to rectify the situation, short of convincing the bank to wipe the 90-day late notification from his credit reports. (No success so far.) But he can make sure his gripes are heard by the right people.

With an ever-increasing number of stories like McKenna's coming to the forefront, Congress and industry regulators alike are shining a light on the credit-card industry's practices. Last year, the Government Accountability Office (GAO) published a report highlighting the increasing complexity of credit-card rates, fees and disclosures. Several high-profile congressional hearings have been held this year and a number of consumer-friendly bills have been introduced that, if passed and signed into law, would put caps on rate hikes and prohibit practices like universal default, which allows creditors to hike your rate if your credit score drops or if you make a late payment on another creditor's account.

"We have a new Congress and the new Congress is angry at the credit-card companies," says Ed Mierzwinski, consumer-program director of the U.S. Public Interest Research Group, an advocacy group. "Two years ago, the credit-card companies were given this gigantic gift, the bankruptcy bill. Now Congress is saying, we did this for you, and what have you done since then? You turn around and beat up consumers."

Most importantly, the Federal Reserve Board, which has the authority to establish credit-card rules under the Truth in Lending Act, is looking to revamp disclosure policies — the first significant overhaul in more than 20 years. Among the proposed changes: Creditors will be required to give consumers 45 days notice before changing account terms, such as fees, as well as before imposing penalty interest rates.

Although consumer groups argue that improving disclosures isn't enough and federal legislation is needed to protect cardholders' rights, the Fed proposal — once it goes through — will be the first opportunity credit-card users have had in decades to stand up for themselves. (Consumers are invited to submit comments — click here, then follow the link for Regulation Z. For more details on Reg Z, see our sidebar.)

It should come as little surprise that the credit-card industry vigorously opposes further federal regulation. Earlier this week, the American Bankers Association (ABA) released a report by economist Jonathan Orszag, which argues that tighter regulations will harm far more consumers than will actually benefit.

By imposing caps on interest rate hikes or penalty rates, Orszag says, the government will force the credit-card companies to charge higher rates across the board, introduce annual fees or limit consumers' access to credit, as well as their choice of credit-card offers. "It's like a balloon," he explains. "If you push on one side — say, the issuer's ability to charge certain penalty fees — you'll see more air shift to a different side of the balloon, for example, annual fees." Moreover, he argues, credit would become less available to consumers with poor credit history, since creditors will not be able to "price" their offers for higher risk. "If you can't measure risk in a precise way, you'll price the product or limit access to it," Orszag explains.

Meanwhile, some credit-card companies are getting rid of chastised practices without the prodding of the heavy hand of the law. Earlier this year, Citibank announced it has eliminated universal default. The bank also stopped "any time any reason" increases in rates and fees for the term of the credit card, typically two years.

Chase, meanwhile, ended its practice of two-cycle billing, which uses a complex formula that factors in the previous two months' balances in order to calculate interest charges. (As a result, consumers who carry a balance are charged interest even for the month after the balance has been paid off.) And the day before a congressional hearing in March where a consumer testified about his experience with Chase — in 2001 he charged $3,200 in wedding expenses on his card, exceeding his $3,000 limit and disastrously resulting in $10,700 in over-limit fees and interest charges over the next six years — the bank announced it will no longer charge over-limit fees after three consecutive months.

American Express told us they have never practiced universal default or double-cycle billing. The other credit-card companies we contacted — including HSBC, Capital One, Washington Mutual, Bank of America, Discover, Wells Fargo and U.S. Bank — did not return calls seeking comment or they referred us to the American Bankers Association.

Cleaning up their act, even on their own terms, already has cost some consumers. Citi Cards, for example, will not increase a card holder's interest rate if they start having problems with other creditors, but it might "adjust the credit line downward, thereby reducing their 'open to buy'," according to John Carey, chief administrative officer for Citi Cards.

Carla Fields, a single mother of two in Dallas, experienced this firsthand when a collection notice on an unpaid $63 electric bill posted on her credit report in January this year. Swiftly, Bank of America dropped her credit limit from $15,300 to $13,500, even though she had never been late or exceeded the limit on that card, or any other of her credit cards. As Fields made payments on the account over the months, the bank continued slicing down the limit so her credit utilization — the portion of used credit used on her card relative to her limit — hovered at 90%. The collections account was her mistake, she admits, as she forgot to pay the electric bill. "I was pregnant, moved, things got lost in the shuffle. But it's just been a big domino effect on everything else."

When you squeeze a balloon, the other side does indeed swell up.