Women & Money | Laws are needed to keep credit-card firms in line

It's nice to see that a few major credit-card issuers have rescinded some of their most egregious practices.

Just before facing a Senate subcommittee hearing, Citigroup, the nation's largest credit-card issuer, announced that it would no longer impose "universal default" on its cardholders. This allowed the company to boost the interest rate on a cardholder's account at the first sign of a late payment on any other accounts the person held. Citigroup also said it would stop its "anytime, any reason" right to raise interest rates at its discretion.

Chase announced that it would no longer use the "two-cycle billing method," a system for calculating interest payments that was a huge cost to cardholders who didn't pay off their balance in full each month.

Don't let them off the hook. I'm pleased that the credit-card industry took these steps, but without legislation forbidding these practices, issuers can change their policies at any time - when Congress stops paying attention, for instance - and reinstitute predatory behavior.

There's plenty more that credit-card issuers can be taken to task for. A recent study by the General Accounting Office documented that their late fees have risen from an average of about $13 in 1995 to $34 as of 2005. If the penalty had merely tracked with the rate of inflation, the late-fee charge would be about $17.25 today. The GAO also reported that about 35 percent of cardholders made at least one late payment in 2005.

A matter of magnitude. Compared with the pre-1990s industry practice of charging a fixed interest rate of about 20 percent, the move to variable rates has led to lower rates for some cardholders. Among accounts at the six largest credit-card issuers studied by the GAO, about 40 percent of cardholders are currently levied at a rate under 15 percent.

That means 60 percent of cardholders pay at least 15 percent interest, and in the most extreme cases, 30 percent or more. With the prime rate at 8.25 percent, credit-card issuers have quite a safety cushion in terms of what they charge to offset the risk of cardholders' not paying.

Credit-card issuers generate huge profits with these late fees and interest rates, and it should be addressed.

Highest first. It's ridiculous that credit-card issuers, not consumers, are the ones who decide which balances a cardholder must pay off first.

For example, if you have a balance transfer at a low rate, a balance for new charges that's levied at a higher rate, and a cash advance at an even higher rate, most credit card companies are going to take your monthly payment and apply it to the balance with the lowest interest rate.

However, it's widely accepted that the best way for consumers to tackle their debt is to get rid of their highest-rate debt first. Clearly, credit-card companies often make that difficult.

A lack of clarity. It would also be helpful if the credit-card companies were required to clearly explain all their fees and interest rates. There's no reason that all the pertinent charges and policies aren't listed in a clear, one-page chart.

And when is someone going to force credit-card issuers to spell out the net effective rate of the interest charged? Right now, the percentage you see on your statement is the annual percentage rate (APR), and it doesn't take into account the compounding of that rate over the course of a year, the annual percentage yield (APY). This is always going to be slightly higher than the APR. Current law allows credit-card companies to emphasize the APR and underplay the APY.

Lapsed education. The issue of clear disclosure in consumer-friendly language is especially important for credit cards issued to college students. A recent survey by Sallie Mae found that more than half of students accumulate more than $5,000 in credit-card debt, while a third of survey respondents reported they left school with $10,000 in credit-card debt.

A lot of these young adults feel that they were duped by the issuers. We require high school students to take driver's education and pass written and driving exams before we allow them to operate a car. But we do absolutely nothing to educate them on how debt works, and instead allow credit card companies to set up booths at freshman orientation and sign kids up for cards with sky-high credit limits. Ideally, every college-bound student needs a quick course on the true cost of debt.

In the meantime, clear language in credit-card agreements and the monthly statements would help new cardholders. Then they could possibly make more informed choices about how they use their card. That's basic credit education all consumers are due.