MSNBC -- Red Tape Chronicles

Credit Card Companies' Change of Heart

Bob Sullivan, March 9, 2007

America's credit card companies: Champions of the poor? Apologizing to indebted consumers? Someone check the thermostat in hell.

What to make of this sudden, very public about-face by America's credit card companies since January in which they seem to be abandoning many of the outrageous penalty fees that have confused consumers and fattened bank bottom lines for years. Why the sudden change of heart? Were they visited by the ghost of Christmas past during the holidays, or at least, the ghost of Democratic-controlled Congress future?

Or are they just playing possum?

In recent months, Chase and CitiGroup both have announced they will abandon what were clearly among the most egregious fee practices by credit card issuers. But look closely, and you'll see a pattern.

In January, Sen. Chris Dodd, D-Conn., hosted a banking committee hearing on credit card fees. On the eve of that hearing, Chase announced it would discontinue two-cycle billing. That practice is so diabolical and complicated I can't really explain it here. But suffice to say that the moment you don't pay your bill in full, the card issuer will not only assess high interest rate charges on new purchases, it will actually reach one month into the past and charge interest on past purchases too. Instead of being embarrassed during the hearing by this practice, Chase was able to piously say, "We don't do that any more."

This week, card issuers were again hauled before the Senate, this time in front of an investigative subcommittee. Critics were licking their chops, ready to dig into a government report from last year that found heartbreaking stories of indebtedness -- such as that of an Ohio man who charged $3,200 on his cards and then saw the debt mushroom to $10,700 because of fees, penalties and interest.

But just as critics began to sharpen their verbal knives, Citigroup announced it would abandon "universal default," a means of raising credit card interest rates that has universally been decried as unfair. Card companies often pull your credit report every month. Under universal default, they reserve the right to raise your rate if you are late paying any monthly bill. Being late on your car payment shouldn't have anything to do with your credit standing with your credit card issuer, but universal default drew that connection anyway.

Credit goes to the fee-creation team

In truth, universal default was simply another excuse dreamed up by card issuers' fee-creation teams to trip consumers into the lucrative, high-interest-rate bin.

But late last week, Citigroup announced it had seen the light and was abandoning the practice.

Chase also offered another giveback before the hearing. It said it would stop charging over-limit fees. What are those? Remember when your card would be declined if you didn't have enough credit balance remaining to make a purchase? Fee-creation teams realized the firms weren't making any money doing that, so they quietly changed policies to allow consumers to exceed their credit limit and began tacking on a $40 fee for each month the limit was exceeded.

After that Ohio man mentioned that he was charged 47 over-limit fees on his $3,200 balance, Chase now says is will stop levying the fees after 90 days.

Of course, consumers should welcome such changes. It's good to have the big boys abandon these outrageous fees. Perhaps they have seen the light.

Or perhaps something else is going on.

Notice the timing of the announcements -- each one right before a potentially embarrassing congressional hearing. Having sat at such hearings, I can tell you that nothing blunts a good verbal bloodbath more effectively than a witness telling Congress, "Yep, we did that; we were wrong, and we don't do that any more."

Pre-hearing spin muddies story line

News stories following both hearings also were blunted. Instead of stories focused solely on egregious lending practices, journalists had to spend precious paragraphs (as I just did) explaining the card company fee polices and the recent largesse.

The message was now effectively muddied. The original message of these Senate hearings was: Half of American consumers are entangled in terrible loan arrangements with credit card firms that charge usurious interest rates, bury contractual agreements in incomprehensible small print and change those agreements at any time. The message instead became: Card companies might be coming around. Maybe they're not so bad!

Reaction to all this was mixed. Elizabeth Warren, a Harvard Law School professor, author of "The Two-Income Trap" and a perpetual thorn in the industry's side, was decidedly optimistic about the developments.

"This small change is important," Warren wrote on her blog on She congratulated Congress on winning immediate concessions from the industry. "It is a powerful reminder that leadership in Congress makes a real difference."

But Robert Manning, author of Credit Card Nation, took the contrary view.

"It's a pre-emptive strike," he said. He thinks the industry has a plan: Make small concessions now to avoid big new regulations later. "They sacrificed the least-defensible policies to demonstrate that they don't need regulatory oversight. But it will be business as usual."

'Good without negative consequences'

Greg McBride, a senior analyst with, offered a more down-the-middle assessment.

"I think it's a bold step but not one they are taking blindly," he said. "Lost in the shuffle is how competitive the credit card business is. ... (The new policies) could foster good will without negative consequences for the issuer."

Also lost in the shuffle is Citigroup's rejection of its long-standing policy allowing it to raise interest rates or penalty fees "any time for any reason."

Any time for any reason? Could they really do that? They can. In fact, it's standard credit card issuer policy. You can read about that in Citigroup's release.

I find this the most promising piece of news. The most egregious aspect of the credit card industry's behavior is the arbitrary nature of fees and interest rates. One-sided contracts with consumers essentially gave these firms a license to change the terms at any time, which was effectively a license to print money. Citigroup says it will no longer do that. Terms will only change when a new card is issued, the firm said.

One can only hope other credit card issuers will also decide to honor their original contracts with consumers and abide by their agreements. But if past behavior is any indication of future behavior, I wouldn't count on it. What I would count on is this: War rooms full of hidden fee visionaries are right now dreaming up new ways to hit cardholders with new and even more creative tack-on charges that don't run afoul of these recent concessions.

Will those fees make it out of the war room and harm consumers? Only time will tell.
But I would bet my credit card balance on this: If Congress stops here, if consumer outrage over abusive credit card practice simmers down, these hidden fees will be back soon. And they will be bigger than ever. Credit card companies don't deserve the privilege of voluntary compliance any more. They've shown reckless disregard for consumers and should face the consequences of that. Congress must pass meaningful reforms for the industry that commit this newfound fairness to law. Congress must also consider caps on interest rates and fees, strict rules on marketing to younger Americans and the deeply indebted, and mandatory transparency for penalty charge structures. Anything less will land us right back where we are today.


This story ran on MSNBC -- Red Tape Chronicles on March 9, 2007.