Credit card bill of rights: The fine print

WASHINGTON -- Judy Schnarr thought she was doing everything right when it came to credit cards. The 68-year-old Minneapolis retiree never spent more than she could afford, and always paid off her monthly balances in full.

Then her sister's death brought an unexpected trip to Oregon. Schnarr put the $1,365 airline ticket on her Target REDcard. The next month, she paid off all but $15, expecting to get hit with a nominal interest charge. But when her next statement came, she was billed $25.44 -- including $10.44 in interest. "I was flabbergasted," she said.

So are many consumer advocates who championed a Credit Cardholders' Bill of Rights that President Obama is expected to sign today. The bill is supposed to protect consumers from arbitrary rate increases and penalties. But it won't necessarily help customers like Schnarr, who ran into one of the most common and least understood practices of the credit card industry: the average daily balance.

Activists say that while the legislation Congress passed this week was a bold first step to help consumers, it will not sweep away all the potential pitfalls in the world of plastic, or what Schnarr calls "ghost money." Heralded as a milestone in consumer protection, the new Bill of Rights is patterned largely after new rules adopted by the Federal Reserve Board that are scheduled to go into effect on July 1, 2010. Bowing to reality, lawmakers passed the legislation by an overwhelming margin of 361-64 in the House and 90-5 in the Senate.

Only two Minnesotans opposed the credit card bill: Republicans John Kline and Michele Bachmann.

Although consumer groups have criticized many current credit card fees and practices, card issuers say terms vary according to the risks posed by different cardholders. That allows banks to offer their most credit-worthy customers better terms and benefits, such as bonus points and airline miles.

Opponents of the legislation also say that while the measure is well-intended, it could backfire by tightening credit, particularly to low-income consumers.

"I understand what Congress is trying to do," said Joe Witt, president and CEO of the Minnesota Bankers Association. "It's a balance. You've got a product that's an unsecured loan."

Backers say that the legislation simply provides better oversight over the credit card industry, without setting rate caps or price controls. One provision, sponsored by Rep. Keith Ellison, D-Minn., prevents banks from jacking up interest on people because they've missed payments to other banks, a practice known as universal default.

The credit card issue has come to a head in recent months as the economy has worsened and ever more consumers find themselves maxing out their credit cards. According to the Federal Reserve, credit card debt is approaching $1 trillion, a 25 percent increase over the past decade.

Delinquency rates are also on the rise, with 5.6 percent of accounts more than 30 days late in the last three months of 2008, a period when 1.8 million Americans lost their jobs.

In all, 78 percent of all households have at least one credit card, and the average household balance is more than $8,300.

Standard practice

Many credit card holders, like Schnarr, a grandmother who has worked as a sheet-rocker, factory worker and claims adjustor, say they simply don't understand the complicated rules that determine what they owe.

"The average person just knows what they deal with day to day," she said. "They do not understand interest fees and compound interest and average daily balances. They don't understand the charges that they're paying."

Average daily balance was what tripped up Schnarr -- a common practice that is used to calculate interest charges and is not banned in the new legislation.

Schnarr, it turns out, had to pay interest on an average daily balance of $967, not the $15 she thought she still owed after paying $1,350 of her flight to Portland.

"I called them and said 'I'm not happy with this.' And they said, 'When you signed the credit card agreement it was all stipulated.' "

Target spokesman Eric Hausman said that while he couldn't comment on Schnarr's specific situation, the company billing practices follow accepted industry standards. "The way we determine charges is explained on the back of the bill," he said.

But while the legislation won't change the common industry practice of figuring interest on an average daily balance -- often one that is much higher than cardholders think they are carrying -- it will end a more extreme form of the practice called double-cycle billing. Under double-cycle billing, banks consider the average daily balance from previous billing periods as well as the current one.

'Level playing field'

According to a 2006 Government Accountability Office report, most card member agreements are written to at least a high school reading level, even though half of adults in the United States read at or below an eighth-grade reading level.

Sen. Amy Klobuchar, D-Minn., a co-sponsor of the bill, said it will protect consumers by clarifying the terms of their credit card agreements.

"Too many credit card companies are using deceptive practices and fine print to take advantage of hardworking Americans," Klobuchar said. "Consumers deserve a level playing field."

Nobody has accused Target of deceptive practices in Schnarr's case. But consumer advocates say that interest calculations based on average daily balances -- one of the most widespread industry practices -- were largely left out of the Credit Card Bill of Rights, and will continue to ensnare unwary consumers like Schnarr.

"It's a problem," said Travis Plunkett, legislative director for the Consumer Federation of America. "Anytime a consumer is charged interest on a balance that has already been paid off, that's an unfair practice."

The trick, consumer advocates say, is to make every payment in full, which gives a cardholder starting with a zero balance the benefit of an interest-free grace period from the time of a new charge to the day the bill comes due. "When [Schnarr] lost the grace period, that gave the card company the right to charge interest on the whole balance, even though she had paid a bunch of it off," said Nick Bourke, project manager for the Safe Credit Cards Project at the Pew Charitable Trusts.

To Schnarr, it may no longer make any difference. She says she's paid her bill and cut up her credit card.

Kevin Diaz • 202-408-2753