WASHINGTON (Reuters) - Legislation may be needed to stop overzealous credit card companies from piling on interest rates and fees that have plunged millions of American families deeply into debt, a senior Democratic senator said on Tuesday.
On the eve of a hearing on the industry’s practices, Carl Levin of Michigan, who chairs the Senate permanent subcommittee on investigations, said too many consumers are suffering from what he called predatory practices and murky fees.
“Millions of families... are kept in debt and are in over their heads not just because of their own purchases... but because of the abusive practices and the excesses of the credit card companies,” Levin told reporters.
Testifying before Levin’s panel on Wednesday will be executives from Bank of America Card Services, JPMorgan Chase’s Chase Bank and Citigroup’s Citi Card.
The three companies did not immediately respond to messages asking to comment on the hearing.
Last week, Citigroup, the third-largest U.S. credit card issuer, said it will no longer automatically raise interest rates for cardholders who fail to make payments on other bills. Known as “universal default,” the practice has long been criticized by consumer advocates who argue that it victimizes poorer borrowers.
Norm Coleman of Minnesota, the top Republican on the subcommittee, said Citigroup’s recent move was encouraging.
“But we need to do more and take a closer look at certain practices and create a more consumer-friendly lending environment,” Coleman said.
Levin said the hearing will illustrate how credit card companies calculate interest rates to extract the largest possible payments from consumers.
For example, if a credit card holder has a monthly bill of $5,020 and repays $5,000 on time, the customer could owe $55.21 in the next billing cycle, based on an interest rate of 17.99 percent, Levin said.
That new balance includes 43 cents of interest from the $20 balance. But it also includes another $34.78 in interest that was based on the original amount of $5,020 even though $5,000 was paid on time, Levin said.
Another industry practice the senators called “trailing interest” would add an extra interest charge of 38 cents even if a customer pays off the $55.21 balance on time, Coleman said.
“I also believe (these practices) are predatory and confusing,” Coleman said.
Consumer advocates estimate based on Federal Reserve figures that outstanding credit card debt amounted to between $750 billion and $800 billion in November 2006. The industry has more than 640 million credit cards in circulation.
Levin said he hoped credit card issuers would voluntarily halt the practice of charging interest on the money paid on time. But legislation may be needed to force the industry to change its ways and to pressure banking regulators to tighten consumer laws about disclosure of fees.
“I’m not naive. I don’t think they are going to do all that is needed,” Levin said, referring to the credit card industry.