"I would like to put the credit card industry, issuing banks and card associations on notice," said Sen. Chris Dodd (D-CT), chairman of the Senate Banking Committee.

"If you currently engage in any business practice that you would be ashamed to discuss before this Committee, I would strongly encourage you to cease and desist that practice."

The committee recently heard testimony from experts on both sides of the credit card reform debate, including Harvard Law professor and bankruptcy expert Elizabeth Warren.

Warren was a staunch foe of the new bankruptcy law, which makes it much harder for consumers to discharge credit card debt.

"A growing number of card issuers increase their profits by loading their credit cards with tricks and traps so that they can catch consumers who stumble or mistake those traps for treasure and find themselves caught in a snare from which they cannot escape," Warren said in her testimony.

"The credit card market is broken, and consumers pay a steep price in this non-functioning market. But it doesn't have to be this way."

Big Fees, Big Business

Witnesses cited a number of instances in which the credit card industry makes its profit through penalizing its customers. Chief among them was the practice of levying fees for just about every transaction -- even charging interest on balances already paid.

Travis Plunkett, director of the Consumer Federation of America (CFA), pointed out that penalty fees for late payments have not only risen in volume, but "have become primarily a revenue enhancer for credit card issuers," he said.

Credit card companies charge fees for things such as paying bills over the phone, which can cost the consumer an average of $5 to $15 per transaction.

Plunkett and several other witnesses referenced a recent study by the Government Accountability Office (GAO) that found credit card fees had tripled in the past ten years, from an average of $13 in 1995 to $34 in 2005.

The report found a 110 percent increase in charging "overlimit fees," when a customer carries a balance higher than their credit limit.

"These monthly fees are charged every month a consumer carries a credit balance higher than their credit limit," Plunkett said. "Critics of this practice argue that issuers should not assess a penalty fee when they can simply enforce the credit limit if they wish to prevent consumers from exceeding it."

In Plain English

Another big target was the complexity of credit card disclosure statements. Prof. Warren noted that the average disclosure statement grew from one page in the late 1980's to "more than 30 pages of incomprehensible text."

"Anyone who has ever tried to read a credit card agreement knows that the terms are simply incomprehensible," Warren said. "The inserts sent along with monthly bills to amend the card agreements are filled with language even a lawyer would have difficulty parsing."

MSN Money columnist Liz Pulliam-Weston recently discussed the practice of not even disclosing the card's actual interest rate until the applicant has been approved for it.

This could lead to cardholders playing "Russian roulette" when selecting a credit card, as they might end up agreeing to an interest rate of 30 percent or higher without their knowledge.

"If you have a good credit history, you should get a good rate, not one that's been inflated to cover the risks of others who haven't been as responsible," she said in a recent column.

The Interchange Wars

Another hidden fee that traps consumers is one they never hear about at all -- the "interchange fee" that retailers pay to process transactions made with credit cards.

Merchants have been waging war with the credit and banking industries to disclose and standardize these fees, which they say amount to a "hidden tax" on consumers.

In his opening statement, Dodd specifically targeted interchange fees as "opaque" costs which "are passed on, in part or whole, to consumers who have no knowledge or understanding that a fee is even a part of the cost of bread or milk, or any other consumer product."

Dodd noted that interchange fees net between $30 and $40 billion for the credit industry annually.

The Merchants Payments Coalition, a trade association of businesses opposed to interchange fees, hailed Dodd's statement.

"The credit card companies have long profited from placing hidden fees and practices on unsuspecting merchants and consumers," they said in a statement. "The interchange fee is the biggest fee consumers have never heard of and accounts for more than the total of all other consumer fees such as late fees and over-the-limit fees."

Over the Top

Most of all, the expert witnesses emphasized the willingness of banks to lend to just about anyone as a prime reason for the explosion in consumer credit card debt.

Travis Plunkett noted that as consumers cut down on their total credit card balances, the industry responds with ever-more-aggressive marketing, usually through direct mail solicitations.

"CardTrak estimates that each household receives nearly 50 credit card solicitations in the mail each year," Plunkett said. "Issuers have increased the number of mailed credit card offerings by six-fold since 1990, from just over 1.1 billion to a record 6.06 billion in 2005. The number of solicitations mailed by issuers in 2006 likely exceeded this amount."

Robert Manning, Rochester Institute of Technology Professor and author of Credit Card Nation, pointed to the expansion of lending to lower-income households as one reason why overall credit card profits -- and consumer debt -- is booming.

In Manning's view, the more that lower-income families were ensnared in credit debt, the more their debt could be used to finance larger lending moves for wealthier customers.

"To make the assumption of debt more attractive to these households -- and to entice them into carrying debt for longer periods -- creditors lowered minimum payment balances from around five percent of principal to just over two percent," Manning said.

"More than one-quarter of the lowest income families spent over 40 percent of their income on debt repayment in 2001 ... [the] 'democratization of credit' has had serious negative consequences for many Americans, putting them one unexpected financial emergency away from bankruptcy."

Hope On The Horizon

The hearing put credit card issuers on notice that change may be on the way. Dodd introduced legislation in the previous Congress that would ban certain penalty fees and mandate clearer disclosure of credit card terms and is expected to introduce a tougher version of the bill this year.

Still, Prof. Warren warned that Congress has a limited window of opportunity in which to act.

With the continuing slump of housing sales causing more defaults and foreclosures, and job growth continually shaky, consumers need help from their debt.

"Americans benefit from markets that work," Warren said. "If Congress repairs the busted credit card market, then Americans -- consumers and businesses alike -- will benefit as well."

This story ran on Consumer Affairs on January 29, 2007.