For decades, the credit card industry has been issuing credit cards with onerous provisions. These have ranged from universal default clauses, to mandatory arbitration provisions, to allocation of payment clauses. Promotional interest rates disappeared quickly, and credit care companies charged fees for a variety of events, including obtaining a card, late payment on a card (even an hour late), and over the limit charges.
With the current economic crisis, the situation has worsened. Grace periods have been shortened, good paying customers have been charged for being on time, and more vulnerable users of credit have seen their rates rise for no apparent reason other than that they live in the wrong zip code.
The time was right for legislative change, and in May 2009, President Obama signed the Credit CARD Act of 2009 into law. With limited exception, it goes into effect Monday.
There are plenty of reasons to cheer the new legislation. The arguments of consumer advocates have been heard, and many of the new provisions will improve the plight of consumers, and college students, who use credit cards. That is very good news. But there are several particularly troubling aspects of the new law: one is the product of omission and the other an act of commission. Both have a negative impact on financially vulnerable individuals, most particularly college students.
An Omission: Interest Rate Caps
The Credit CARD Act has numerous provisions dealing with interest rates -- and for good cause. Consumers have seen their interest rates change quickly -- sometimes moving from the single digits to double digits. They have seen higher fees for being late or over the limit. The credit card companies have disclosed the right to raise rates and charge fees, albeit in small print in the original credit card agreement or in subsequent amendments to the original agreement -- changes that consumers neither see nor read.
Many of these situations are addressed head-on in the new legislation. To name just a few, the new law provides that interest rates cannot suddenly change. Consumers are now entitled to 45 days’ notice of rate increases. Rate increases for non-payment occur only if the payment is more than 60 days past due, and, importantly, the creditor must restore the original interest rate if payment of at least the minimum amount is made on time for six months. Promotional rates on new accounts must stay in effect for six months, and no interest rate or fee changes can be made in the first year.
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These are important improvements. What is conspicuously missing is any cap on interest. Because of a 1978 Supreme Court decision, credit card interest rates are governed by the law of the state where the cards are issued; importantly, certain states have no usury caps on credit cards, and not surprisingly, these locations have become home to most credit card issuers.
So, while the Credit CARD Act addresses when interest rates can be changed, how payments can be allocated, and when the rates must be lowered, there is no ceiling on how high rates can go. An effort by Sen. Bernie Sanders of Vermont to change this result did not gather traction.
Two things are clear. First, credit card interest rates and/or fees have already and will continue to increase to offset the costs of this legislation on the credit industry. Second, while rates will probably rise for all consumers, the rates will increase disproportionately for more vulnerable consumers – the ones who are least able to sustain high rates. In short, the credit card industry will recoup the losses incurred by the legislation by overpricing for risk, and vulnerable individuals will pay more for credit. And don’t get me started on the work-arounds that are already being employed to circumvent both the letter and spirit of the new legislation.
Students will be hurt not only by rising interests rates, but also by another set of changes within the Credit CARD Act.
The new law limits access to credit cards by college students. Individuals under age 21 need either (1) parental (or other adult) co-signers with fiscal strength to get credit; or (2) independent capacity to repay debt incurred.
Since vulnerable students may not have parents with financial wherewithal and may have very limited independent means of making payment, credit cards for these students will be more constricted. If and when credit is extended to the independent student, the rates of that credit will most likely be high. And, in the absence of an interest cap, the amounts paid by the most fiscally challenged students will well exceed that of the middle- or upper-class student.
Stated most simply, those least able to afford it will have their rates rise. This result could be ameliorated by a credit product specifically designed for fiscally challenged students – a card that has low interest rates, a low credit limit but an even lower spending limit. This type of product would enable vulnerable students both to access credit and to build that all-important credit score, which has increasingly been used to determine employability and insurability.
Act of Commission: Education During Orientation
One of the most pernicious aspects of credit cards for students has been that colleges facilitate and benefit from student buy-in. Through on-campus permitted distribution and contractual tie-ins, some colleges earn up-front and ongoing revenue from students who obtain and then use college affinity cards. Credit card companies have appealed – with the tacit blessing of educational institutions – to students’ desire for free products.
T- shirts, mugs, tote bags, Frisbees. You name it. Kids like free things.
The identified practices are indeed troubling, but the new legislation does not provide a quality solution. The new law requires that educational institutions and credit card companies make public their agreements with each other, although it does not dictate the form and quality of this disclosure.
It is highly probable that the disjuncture in time between the product offering and the relationship disclosure will mean that most students will not be aware at the time of acquisition of the credit of the shared relationship and monetary implications.
The legislation does try to eliminate the “free” gifts that accompany credit card solicitations – if they occur on campus, near campus (undefined) or at a college sponsored event.
However, this does not mean “no more free t-shirts” for students. The prohibition is implicated only when the gifts are an enticement to enter into a credit card agreement. Consider what happens if the gifts are just offered – without, at that moment in time, soliciting the student for credit cards. Then, fast forward a month or two and that same credit card company solicits the student at an athletic event. As advertising and marketing agencies know well, brand recognition is a key driver in purchasing decisions.
Finding Teachable Moments
The legislation’s most ill-conceived suggestion is that institutions of higher education make debt education, credit card education and counseling sessions a part of orientation. Educators know well that for education to occur, it must happen at a teachable moment. For any complex subject like finance, there is no less teachable moment than orientation -- when students are seeking to settle into their rooms, meet their roommates, find classrooms, the bathroom and the dining hall.
For all students, but most particularly for first generation and financially vulnerable students, the start of college is unsettling. Just read the first few chapters of Ron Suskind’s A Hope in the Unseen,chronicling the experiences of Cedric Jennings at Brown. For students like Jennings, educators have been struggling to find ways to ease the transition to college, to help students make needed connections with fellow students, staff, and faculty. Discussions about money and credit are hardly the right topic – indeed, for some students, their lack of money is already a significant problem as they struggle with whether and how they will fit in with their more well-heeled compatriots.
Learning and teaching about money is hard. Quality financial literacy education is not just about creating a budget and living within one’s means. It involves understanding the role money has played within a family, within our culture. It is about recognizing the remarkably complex symbolism of money – how it is a stand-in for other critical values like love and power and self-worth and self-esteem. Most financial literacy programs fail because they teach about money as if it were just like any other subject matter to be conquered.
Financial education is important -- very important -- but not at orientation. Education done badly may be worse than no education. For vulnerable students, indeed for all students, we can find a better time to teach them about managing finances.
When to Cheer
The Credit CARD Act of 2009 has many exemplary provisions -- provisions that will help level the consumer financial market playing field. Unfortunately, as demonstrated here, we still have work to do in our quest to protect the most vulnerable students on our campuses. We should do this before we start cheering the law’s February 2010 effective date too loudly.