Sen. Levin Holds Hearing on Credit Card Practices

WASHINGTON – Sen. Carl Levin, D-Mich. and Norm Coleman, R-Minn., chairman and Ranking Republican of the Senate’s Permanent Subcommittee on Investigations, held a hearing of the subcommittee today to examine fees, interest rates, and grace period practices used by credit card companies that saddle consumers with billions of dollars of debt.

“The credit card industry thrives on the confusion and powerlessness of consumers to both nickel and dime the average card-holder and to commit highway robbery of anyone who slips up even in the slightest,” said Levin.

The committee heard testimony from the CEOs of the top three credit card issuers in the U.S., as well an Ohio consumer, Wesley Wannemacher, who used a Chase Bank credit card in 2001 and 2002 to pay for approximately $3,200 in expenses for his wedding. These expenses exceeded the credit card limit of $3,000 by about $200. Over the next six years, he made payments toward the debt averaging about $1,000 per year, and as of February 2007, he had paid about $6,300 on his $3,200 debt. However, his statement showed that he still owed $4,400 – a total of $10,700 in charges for $3,200 in purchases.

“This case may seem extreme or unfair, but what our investigation has shown is that those types of charges and fees are actually common in the credit card industry,” said Levin, who added that Wannemacher was contacted by a Chase representative after he agreed to testify before the subcommittee and was told that they had reviewed his account and decided to forgive his balance.

In October 2006, Levin released a U.S. Government Accountability Office (GAO) report analyzing credit card fees, interest rates and related disclosure provided to consumers. The report, which was requested by Levin, was the first federal study to compile in a single place a description of the recent fees, interest rates and disclosure practices of 28 popular credit cards from the six largest credit card issuers. Following the release of the report, Levin began an investigation into some of the practices, focusing on three fundamental issues that will be discussed at the hearing today: grace periods, interest rates, and fees.

Grace Periods. The subcommittee’s investigation found that, although many consumers think that all credit cards provide them with a grace period before interest is charged, in fact most credit card issuers do not provide a grace period to cardholders unless they pay their credit card balances in full each month. If a consumer has any balance owing on a card from the prior month, there is no grace period on new purchases -- every purchase racks up interest charges from day one.

Interest Rates. The subcommittee reviewed the GAO’s findings that credit card issuers typically apply multiple interest rates to the same card, depending on the circumstances. For example, the credit card industry typically uses one interest rate for cash advances, another for regular purchases, a third for balance transfers and account checks, and if a cardholder pays late or exceeds a credit limit, the company may substitute a so-called penalty interest rate that can exceed 30%. When a consumer pays off a portion – or even the majority – of a monthly balance, the credit card industry charges interest on the entire amount previously owed, including the portion that was paid before the due date.

“It is indefensible that these banks charge interest on money that a consumer has paid on time,” Levin said.

Fees. At the hearing, Levin discussed a host of fees imposed by the credit card industry, including late fees, over-limit fees, and fees charged for paying a bill over the telephone. Mr. Wannemacher exceeded the limit on his card 3 times for a total of $200, but was then charged 47 over-limit fees totaling $1,500, an amount seven times greater than the amount for which he was being penalized.

“Excessive fees are then made worse by the industry practice of including all fees in a consumer’s outstanding balance so that they incur added interest,” Levin said. “In other words, the higher the fees, the higher the balances owed, and the higher the interest charges.”

At the hearing, the bank that handled Mr. Wannemacher’s account announced that it would no longer charge consumers repeated over-limit fees, but would limit them to three consecutive charges.

The committee heard from the CEOs of the three largest credit card issuers in the country – Bank of America, Chase Bank, and Citigroup – who described the credit card practices use by their banks. The subcommittee also heard testimony from Alys Cohen of the National Consumer Law Center regarding its findings on credit card practices.