Veto Halts Curbs on Credit-Card Policies
Last week, New York Gov. George Pataki vetoed a bill that would have made his state the first to take action against the credit-card "universal default" policies.
Consumer groups have been trying to get legislation passed in the U.S. Congress as well as state legislatures to restrict a credit-card company from raising interest rates on its customers, even those who are current in their monthly payments, because those customers may be late in paying other creditor (such as another credit-card company or utility) or have taken on so much debt that their credit scores drop. So far, all their efforts have been unsuccessful.
Credit-card issuers say higher interest rates (which are around 30 percent although some are as high as 35 percent) need to reflect their risks and the overall creditworthiness of the borrower. But customers have complained that they have little choice once the higher rate is imposed; if they want to continue using the card, they have to accept the higher rate. If they refuse, the account is closed, with the cardholder liable for the existing balance at the old rate.
Earlier this summer, the New York State legislature passed a measure barring credit-card companies from raising interest rates because a consumer had missed or made a late payment to another creditor. Pataki vetoed the measure last week, citing "a serious technical flaw." Pataki said "it is unclear whether a credit-card company would be prohibited from increasing the interest rate it charges based on a change to the consumer's credit score where such a change is attributable solely to the consumer's indebtedness or failure to make timely payments to any other creditor." That ambiguity, he added, "could result in the imposition of criminal penalties ... for conduct that heretofore had been lawful."
Linda Sherry of Consumer Action, a nonprofit organization that conducts an annual survey on fees and rates and that was pushing for the New York law, disagrees and said the governor's reasoning "was a poor argument for vetoing. ... The so-called ambiguity does not exist. The intent of the legislation was to prohibit a credit-card company from increasing a cardholder's APR based on their record with OTHER creditors. Yes, a deterioration in a person's credit score can be driven by negative reporting from creditors; however the intent of the legislation was clear. If no default exists with the card company implementing the hike, such an increase should be prohibited -- despite the fact the cardholder's credit score deteriorated."
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