N.Y. Passes Bill Ending ‘Universal Default’ for Credit Card Issuers
July 06 2006
The New York state legislature passed legislation last week that outlaws the use of universal default, a common practice by credit card companies that raises credit card rates based on a card holder’s unrelated financial activity.
New York is the first state to provide such a protection against this practice, according to Consumer Action, a non-profit group in San Francisco.
If Gov. George Pataki signs it into law, credit card issuers will be prohibited from increasing the rate of interest on an outstanding balance based on a holder’s indebtedness or late payments to other creditors, and won’t be allowed to impose a fee on the outstanding balance solely as the result of the card holder’s indebtedness or payment failure to any other creditors.
“A late payment on a telephone bill could cause the interest rate on a credit card to soar,” the legislation reads. “Most of the top 10 credit card companies punish credit card holders for late payments on any other bill, even if the card holder has never been late on a payment to the card issuer.” The bill’s sponsors stressed that consumers are rarely aware that credit card companies are raising rates or imposing fees.
“Consumers are under attack by schemes to overcharge them in order to increase corporate profits,” the legislation states. “Credit card companies are developing financial practices that penalize everyone but the very rich.” Currently, missed payments on utilities, taxes and on mortgage, auto and student loans all can affect the interest rate on a credit card.
“Credit card companies are the only industry in the world to re-price something you already paid for,” comments Linda Sherry of Consumer Action, which conducts an annual survey on fees and rates. Universal default rates were as high as 29.99 percent in 2004 and have risen to 35 percent this year, this year’s survey found.
A spokeswoman for the New York Bankers Association said the trade group did not oppose the legislation.