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Sunday, August 14, 2011

Essay on Analysis of Credit Card Reform Act of 2009

Mastercard, one of the leading credit cards in the world, once released several commercial advertisements with the slogan “There are some things money can’t buy. For everything else there’s MASTERCARD.”  The commercial advertisement highlighted that there are some things that money will not be able to buy such as happiness, contentment, and freedom.  Subliminally, the commercial advertisement also sends out a message that the use of credit card can help consumers and buyers buy so many other things such as clothes, perfumes, and jewelries.  Implicitly, the advertisement is suggesting that the consumers can use their credit cards to buy anything even if a person does not have money. 

Since credit cards can be used to replace cash or money, it has been considered one of the most convenient tools that mankind has ever created.  With the use of credit cards shoppers who do not have cash but are expecting money in the future can conveniently use the credit card for their shopping.  They can simply pay their bills when the due date comes.  Credit cards are also convenient in emergency situations such as paying for hospital bills, hotel bills, utilities and other emergency expenses since almost all companies are now accepting either MASTERCARD or VISA as a mode of payment.  
However, the use of credit card comes with a heavy price.  Many credit card users have been unable to pay their credit card companies because of excessive use of their credit cards.  These financial problems have made the situation of many credit card users worse in view of the current global financial crisis.  Most of these credit card users do not realize that credit card companies do not only charge interest every time the credit card user fails to pay their balance on the due date but they also charge late penalties every time a credit card user fails to pay on the due date.  As a result, there have been many reported cases where consumers complain about the heavy interests being imposed by credit card companies.

Presently, credit card debt has increased by 25% over the past decade.  It has reached a total of $963 billion in January (David Shestokas, 2009, p.1).  The percentage of accounts that is more than 30 days late has increased from 3.9% in 2006 to 5.6% in 2008.  Moreover, the penalty fees already amounts to $15 billion a year.  Because of the impact of a credit card debt on a person, the government cannot simply turn its back against the unreasonable and borderline-fraudulent practices of credit card companies. 

II. Unfair Business Practices Among Credit Card Companies
According to studies conducted by, credit card companies are aggressive in conducting marketing campaigns to encourage consumers to get credit cards.  In 2006, for example, the average household received an average of eight (8) credit card offers each month.  This represents a 30% increase compared to 2005.  Students who are the most vulnerable groups in view of the lack of experience on dealing with finances are also asked to get credit card several times a week through flyers, online advertising and on-campus marketers.  Oftentimes, these credit card companies rely on hard-core tactics just so they could encourage the consumers to apply for a credit card. 

Meanwhile, little do the consumers know that as soon as they start using their credit cards, the credit card companies spring on their different kind of traps just so they could gain substantial profits.  One of the known credit card company practices includes the low “teaser” interest rates (“The Worst Credit Card Industry Practices”, p.1).  This pertains to the interest rates which credit card companies use to attract credit card users.  Credit card companies can increase their interest rates so suddenly.  Consumers are often surprised to find out that the low interest rates which convinced them to apply for a credit card have disappeared so suddenly as it can be obliterated by the sudden increase in interest rate which the credit card companies

Another unfair credit card practice is the giving of freebies on campus (“The Worst Credit Card Industry Practices”, p.1).  Credit card companies often go to different campuses and companies to give out different kinds of trinkets and freebies such as low cost airline tickets, tee shirts, candies, pizza, mugs and anything that they can give out.  These freebies are used to lure the unsuspecting consumers without fully disclosing the unfair terms and conditions contained in the contract.

The reality, however, is that credit card companies impose retroactive interest rate increases on their consumers.  This means that credit card companies may suddenly increase their interest rates and apply them for products that consumers have purchased before the increase took effect.  For instance, a consumer who just decided to buy an expensive cell phone thinking that the interest rate is still low may be surprised to find out that that company has increased the interest rate and applied the same to consumers’ past purchases.

Credit card companies also hide fees, costs and penalties from their consumers.  One of the common consumer complaints is the $5 to $15 fee imposed to make a single bill payment by telephone or even on the internet.  Other companies have fraudulent foreign currency transaction fees between $2 to $13 simply for obtaining a single copy of a billing statement or other record.  Consumers who were not informed about these hidden costs will be surprised to find out about these costs once they receive their billing statements. 

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It is also noticeable that the notices and fees imposed by credit card companies are hidden in fine print at the back of the billing statements.  Credit card companies make sure that the consumers are not aware of these costs by printing item in small letters at the back of the statement. 

Because of the problems that have arisen in the use of credit cards and the consumer complaints against the practices of credit card companies, in 2009, the President signed a law that seeks to restrict the practices of abusive companies that contribute to the financial problems being experienced by consumers during the recession period.  This law is known as the Credit Card Reform Act of 2009.

The Credit Card Reform Act of 2009 does not seek to exempt the credit card users from paying their obligation.  It must be stressed that a credit card obligation is a debt which the consumers should pay.  It is an obligation that is pursuant to a legally valid and binding contract.  Since a contract is the law between the contracting parties it is expected that each of the parties to the contract should comply with the terms and conditions of the contract.  However,

However, it is one of the objectives of the Credit Card Reform Act of 2009 to instill a sense of responsibility towards their consumers.  In 2009, President Obama stated that “We're not going to be giving people a free pass and we expect consumers to live within their means and pay what they owe. But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives” (Cathy Chu, 2009, p.1) While the consumers are bound to pay the credit card companies pursuant to a contract, credit card companies cannot abuse their superior position over the consumers.  It must be stressed that in a study conducted by, about 90 million households carry credit cards and that every household already has an average of $10,500 debt.  Any unreasonable business practice may affect the capacity of the consumers to pay their credit card obligations. 

III. Features of the Credit Card Reform Act of 2009.
A. Protection against Interest Rate Increases
One of the features of the Credit Card Reform Act of 2009 is that it protects the consumers by restricting the increases in interest rates during the first year of their use.  In the past many consumers who have been issued credit cards complained about the sudden increase in the interest rates.  In fact, in many instances, the consumers will just be surprised upon receiving their billing statements that the interests they need to pay for have increased without their knowledge.  Under the new law, credit card users are protected against sudden increases in their interest rates for at least one year from the time they opened their account.  The only exceptions are when a) When the increase varies under a variable interest rate; or when the required minimum payment is not received within 60 days after the due date.

The Credit Card Reform Act of 2009 also protects the consumers against sudden increase on the interest rate on the existing balances.  In the past, consumers complain that credit card companies increase their interest rate even if they still have an existing balance which they purchased before the new interest rate took effect.  Consumers claim that new interest rates should be made applicable only to purchases at the time the new interest rate took effect.  Thus, under the new law, credit card companies are restricted from increasing their interest rate on existing balances except when a) the increase is under a variable interest rate, b) it is the end of a promised time period for a promotional rate and c) the required minimum payment is not received within 60 days after the due date.

IV. Plain Language Disclosure
Another feature of the Credit Card Reform Act of 2009 is the Plain Language Disclosure.  Many consumers complain about the costs and fees which are hidden in fine print behind the billing statements.  The law now requires the credit card contracts to disclose the costs and fees to consumers so that the consumers may be fully apprised of the pros and cons of the use of credit card.  It is the objective of the law to ensure that consumers are aware of the interest rates and the manner by which it is computed sot that consumers may be assisted in managing their finances. 
Thus, the credit card companies are now required to give the consumers clear disclosure of account before they open a credit card account.  Pre-opening disclosure requirement will include the fees that the consumers may be charged in case they fail to pay on their due date.  The statement will also show the fees that the consumers paid and in what manner they were applied to the credit card debt.

C. Real Information about Financial Consequences
It is also the objective of the law to give the consumers real information about the financial consequences of their decision.  For instance, consumers may ask the credit card companies how long it would take them to pay off the existing balance and the total interest cost if the consumers only pay the minimum due and if the consumers fail to pay on their due dates.

D. Protection given to College Students.
Another feature of the Credit Card Reform Act of 2009 is the special protection given to young consumers such as the college students.  Studies say that the average college graduate has almost $20,000 in debt and that the average credit card debt has increased 47% between 1989 and 2004 for those between 25 to 34 years old and 11% for 18 to 24. (Ben Woolsey and Matt Schulz citing, 2010, p.1)

In the past, college students have been the target of many credit card companies.  Because they realize the desire of many students to be able to buy things they like without having to initially worry about cash, many credit card companies extend their marketing gimmicks in colleges and universities. They lure the unwary college students into applying for a credit card and convince them that it is easy to pay for the purchases they made using their credit cards.  Credit card companies are not concerned about the age and the capacity to pay of these college students.  Since they do not screen their applicants even those below the age of 21 and have limited capacity to pay are able to obtain credit cards.  Some unscrupulous credit card companies will even raise the credit card limit to such an extent that it is already beyond the students’ capacity to repay the credit card companies.  Consequently, many college students are trapped on their financial obligations to credit card companies because of their inability to repay them and to pay their interest rates.

Under the Credit Card Reform Act of 2009, the credit card companies are now required to make sure that the students below the age of 21 who file a credit application should either have a consigner who is over the age of 21 or should pass the screening process which indicates that the students have the financial capacity to pay the credit card bills.  Under the new law, students are protected against the fraudulent practices of credit card companies since they can now be guided by adults who are above the age of 21.  Moreover, by ensuring that students applying for credit card who are below the age of 21 have the financial capacity to pay, the possibility of students being unable to pay their credit card bills will be lessened or reduced. 

Because students are tempted to increase the credit card limit, the Credit Card Reform Act of 2009 also requires that before the credit card companies may grant an increase of the credit limit the consent of the cosigner who is above the age of 21 should first be secured.  It protects the students from the sudden urge of spending and consuming the entire credit limit even if they know that they will not be able to repay their purchases.  

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