I have been following two efforts to reign in abusive practices of the credit card companies. You may recall my take on the Credit Card Bill of Rights, and the New Rules. They are both very good ideas that face the same problem, neither of them have been enacted. With the Bill of Rights legislation, it has been held up in congress and faced very little chance of being signed by the previous President. It is highly likely that President Obama will sign it, if he gets it.

The problem with the New Rules, is that they do not take effect until July of 2010. That is like an alcoholic promising to stop drinking in a year or two. Today, there is good news as Senate Banking Chairman Chris Dodd of Connecticut announced that the bill has left the Banking Committee. In his online editorial, he summarizes the practices that will be outlawed by this bill, now called “CARD”:

1. Rate Hikes With No Reason – Dodd rightfully concludes that you don’t have much of a contract when the other side is free to change the terms at any time and for any reason. That is what happens when so called “fixed rates” are subject to change at any time.

2. Universal Default – This is the bizarre practice of changing your interest rate based on late payments made to other companies. The end result is that your rate gets jacked up on all of your cards for seemingly unrelated events. I don’t even know of mobsters who do that (not that I know too many mobsters).

3. Infinite Penalty Rates – Here, credit card companies charge you a penalty rate from the moment you are a day late on one payment, for years into the future as long as you carry a balance. Dodd’s bill will limit that to a maximum of six months.

4. Marketing to Young People – The bill will prohibit aggressive marketing of cards to young people. Apparently, they are offering credit to recent high school and college graduates in an effort to get them in debt for the rest of their lives. This is kind of like drug dealers offering product for free to the not yet addicted, or tobacco companies marketing to children.

5. Double Cycle Billing – Only a credit card company can imagine charging you interest on money you have already paid. I have no idea how this is legal now, but this bill will eliminate it.

Why I Am Optimistic

In the past, the bill has always failed, likely due to massive behind the scenes lobbying of the credit card industry. They contend, rather pathetically, that consumers will be hurt by this bill as they will offer fewer credit cards with lower limits. My opinion of that argument is that it is pure baloney. Even if it were true, it might be a good thing. I imagine that companies might offer less credit to their weaker customers, but then offer more to their stronger ones to make up for it. They may also raise fees to merchants. Either way, I am 100% sure that people with good credit will still be able to receive as much credit as they can responsibly use. Those with weaker credit may get less, but they will no longer be subject to these abusive practices.

The reason I am optimistic that this law will pass is twofold. First, there has never been a moment in my lifetime that the banking industry has had so little clout and credibility. We are on the verge of a credit card crisis on the same order of the mortgage crisis. People are being taken advantage of by credit card companies at record levels, and there is broad public support for this measure.

Second, if nothing happens, most of these rules will take effect anyways next year. Politicians, who might otherwise succumb to industry lobbying will now feel free to support this and take credit for rules that would otherwise take effect eventually. Finally, the industry probably won’t spend much time, effort, and money to oppose it when it is inevitably anyways.