Credit Card Laws and Court Rulings–Have They Helped Consumers?

Congress passed the Credit CARD Act in May but gave issuers and banks almost one year to implement the major provisions of the bill. Since then, issuers did exactly what they threatened to do–raise rates and fees on a broad group of cardholders. Consumers and elected officials are not happy about this, and members of Congress plan to introduce a bill to accelerate the effective date of the bill from February 22, 2010 to December 1, 2009.

The CARD Act is not the first governmental attempt to make changes to the credit card industry. United States lawmakers and judges have had mixed success in using laws, regulations, and court rulings to change the industry and protect consumers. Have these been helpful, or have they caused more harm than good?

Here are some of the governmental laws, regulations and court cases that have shaped the credit card terms that we have today.

• Truth in Lending Act (1968)
  Requires uniform method for calculating the cost of credit and publicizing credit terms, including the APR, so consumers can compare credit offers. The advertised terms must actually be available. It bans the unrequested issuance of credit cards, restricts cardholder liability for unauthorized use, requires fair and timely resolution of credit card billing disputes, and puts a $50 limit on cardholder liability for unauthorized charges. (Prior to this ruling, credit card issuer mailed active credit cards out in mass mailing. This created problems with identity theft and fraud for consumers.)

• Fair Credit Reporting Act (1970)
  Protects consumers against incorrect or misleading information in credit files maintained by credit-reporting agencies. Credit bureaus must investigate disputed charges and correct the incorrect charges. If the disputed charge cannot be resolved, the consumer can request the inclusion of their side of the story. Amended in 1996 to regulate collection, dissemination and use of consumer information.

• Fair Credit Billing Act (1974)
  Gives cardholders the power to fight improper credit card charges. Mandates how creditors are to respond to billing errors. Accounts must be handled promptly and fairly.

• Equal Credit Opportunity Act (1974)
  Prohibits discrimination in credit transactions. Requires creditors to grant credit to qualified individuals without a co-signature by the spouse. Credit histories on jointly held accounts must be maintained in the names of both spouses. Requires that issuers must provide in writing the reasons that credit was denied. Credit card applicants must be notified within thirty days if the loan has been approved or not. If the application is not approved, the issuer must give the applicant reasons for the decision in writing.

• Fair Credit and Charge Disclosure Act of 1988
  Requires that applications that are solicited by phone, sent through the mail or any other way made available to the public contain the key terms of the contract. These must include information about rates, fees, grace periods, etc.

• Fair and Accurate Credit Transaction Act of 2003
  Created to address the growing problems with identity theft. Credit and debit card receipts may not include more than the last five digits of the card nor the expiration date. Gives consumers the right to get a free credit report each year from the big three reporting agencies. Increases the accuracy of credit reports and established national standards in regulations of credit reports.

• Credit CARD Act of 2009
  Provides better protections to consumers by prohibiting some unfair practices used by credit card issuers. Also improves disclosures that cardholders receive. Protects against unexpected interest changes and unfair payment allocations, forbids two-cycle billing, mandates that cardholders must receive a reasonable amount of time to make payments, and limits the fees of sub-prime cards.

Significant Court Rulings

Before 1978, 37 states had usury laws that capped rates and fees on credit cards. At that time, the rate for most cards was about 18%. Two court cases invalidated these usury laws and opened the door to the highest rates and fees that we have today. These rulings have given issuers the freedom to charge default rates that can be over 30%, $39 late fees and 5% balance transfer fees.

• Marquette National Bank vs. First of Omaha Service Corp in 1978
  Marquette held the national banks could charge credit card customers the highest interest rate allowed in the bank’s home state, instead of the customer’s home state. As a result, major banks moved to states such as South Dakota and Delaware because these states had no usury ceilings on interest rates and they could export these rates to the other states.

• Smiley vs. Citibank in 1996
  In 1996, the Supreme Court ruled that credit card companies could lift the cap on fees which, like interest rates, used to be regulated at the state level. Late fees were $16-$20 before Smiley. Now, they are as high as $39.