Consumer Watch: Credit card regulations are coming - in a while

If a teacher learns that a student has been rewriting Wikipedia entries instead of doing the assigned research, how long should the teacher give the student to quit her deception and start earning grades the old-fashioned way?

How about a parent who sees a child cheating at a game? Should he be given a few months to learn to play by the rules, or told to start playing fair right away?

Over the last year, Washington has faced those kinds of questions with the nation's credit card industry - and given an answer that would make the most lenient teacher or parent cringe.

Yes, card issuers such as Citibank and Chase will have to quit a set of practices that regulators and lawmakers have finally outlawed as unfair or deceptive.

But not right away. In a concession to the arguments of the card industry that it needed lots of time to adjust, most of the new rules were delayed until February. Some won't take effect until August.

The result? According to a new study by the Pew Charitable Trusts, the nation's dozen largest card issuers - led by banks that taxpayers have spent billions to bail out - have doubled down on the practices that got them in trouble in the first place.

Pew, a Philadelphia foundation that lately has taken a leading role in some of the nation's great policy debates, has been studying the credit card industry for 21/2 years.

Last week, researchers from Pew's Safe Credit Cards Project said every bank credit card they had looked at, nearly 400, bore at least one of the terms that will soon be outlawed as unfair or deceptive.

"Any time, any reason" interest rate increases that apply to existing balances as well as new purchases? All but one of the cards make that possible - up from 93 percent in a similar survey in December.

"Hair-trigger" imposition of penalty interest rates? Nine out of 10 cards allowed rates to rise, often to 30 percent or more, based on one or two late payments in a 12-month period, even if payment is just a few hours late.

"Over-limit" fees, typically $39, for transactions that the issuer could just as easily deny? Eight of 10 banks still would impose them.

Nick Bourke, a lawyer and former consultant to Visa Inc. who now runs Pew's project, says consumers pay a high price for these practices. Just two of them - penalty interest and anytime, any-reason rate increases - cost cardholders at least $10 billion a year and affect nearly a quarter of all accounts, he says.

It's important to remember that Pew was looking at terms being offered online to new customers - borrowers the lenders are trying to lure.

Though it's impossible to see the whole picture, evidence abounds that card issuers are imposing worse terms, including higher rates and new annual fees, on swaths of existing customers.

Citibank, for example, recently raised rates on some cardholders to 29.99 percent - not penalty rates, but basic rates for purchases. Annual fees were a relative rarity in the new-card offers Pew examined, but some issuers are notifying existing customers to expect them.

If you get such a notice, don't assume you're stuck. No matter what the lenders may say, Bourke says, they aren't necessarily repricing accounts based on risk. They may just be using a "test-and-learn" system for finding out what the market will bear.

"The big companies are going to pull out 10,000 or 100,000 accounts at a time and start trying new things with them," he says.

The good news is that resistance may not be futile. It paid off recently for George C. Brown Jr. of Moorestown, a retired teacher and library director.

Brown was upset at a new $79 annual fee on his Chase Prestige Card. But when he called and complained to a supervisor, Chase backed down. "What they're really hoping is that we don't pay attention," Brown says.

In a broader sense, that's been the problem with the entire credit card marketplace.

Card issuers built a business model that seemed to work happily for the four in 10 cardholders sufficiently disciplined and well off to be "convenience users."

If you paid off your card every month and never missed a hoop, you got more than the basic bargain: a convenient cash alternative and access to short-term credit. You were likely showered with kickbacks in cash, frequent-flier points, or the like.

But that card came with an ugly flip side. Those who missed hoops - including some who were usually convenience users - got penalized with extra fees and rates that many considered usurious.

At its worst, the system resembled a bait-and-switch scam: With the acquiescence of regulators who trusted the market to police itself, card issuers crafted terms that allowed them to lend thousands of dollars to a borrower at a reasonable interest rate and then triple or quadruple the rate for flimsy reasons, or no reason at all.

Sadly, that's what passed for "financial innovation" in the credit card industry, and Washington is wisely putting a stop to it. The question is: Why are we waiting until 2010?

Pew is pushing for an immediate halt to the worst practices. Congress should heed its call.