Prior to the CARD act, issuers were allowed to charge different interest rates for purchases, cash advances, and balance transfers (CCBR). This frequently left the cardholder with multiple interest rates on one card. Credit card issuers would then allocate a cardholder’s payment to the lowest rate of interest rather than the highest rates of interest. By allocating the payment and making cardholders pay off their lower interest balances first, the time it took consumers to pay down their debt extended, and the total amount of interest paid to the credit card issuer increased significantly. A study conducted by the Center for Responsible Lending found that only three percent of borrowers understood credit card issuers’ payment allocation policies (CRL). The CARD act addresses this extremely controversial practice by requiring credit card issuers to apply the amounts in surplus of the minimum payment to the highest interest rate balances. An improvement to the previous state to say the least.
Credit card issuers also used “universal default clauses”. These clauses enabled credit card companies to increase rates of interest based on factors unrelated to a cardholder’s payment history with the credit card issuer. The clauses are usually in fine print and rather difficult to cognize. For instance, if a cardholder failed to make a payment to another creditor, the credit card company is able to increase the rate of interest charged to the cardholder. Being late on any payment to another creditor could trigger such an increase. However, this practice wasn’t used by all companies, notably the larger ones. In fact, these larger companies would instead increase rates of interest through a “change-in-terms”, unlike universal default in that this practice requires prior notification to the customer (WWW). Universal default was criticized by many who felt it was unjust to impose penalties on cardholders who haven’t defaulted on a payment with that specific issuer (WWW). Additionally, credit card companies exploited universal default for the sole reason that they weren’t required to notify cardholder’s when they increased rates of interest. Credit card companies also failed to take into account the various problems with credit reporting and scoring when they increased the rates of interest. The lack of accuracy in credit reporting and scoring is a significant problem, with a study finding that nearly twenty-nine percent of credit reports had errors that could result in a denial of credit, and seventy percent of credit reports contained some sort of error. Credit scoring is a complicated process and differs from scoring system designs. The translation of a credit report into a credit score is a closely held secret that has not been examined by government regulators. The CARD act prohibits universal default clauses (WWW). The issuer is required to monitor accounts whose APR has increased every six months to determine whether factors contributing to the increase have changed (WWW). The issuer must also have methodologies to monitor increased APR accounts to determine whether a subsequent decrease is appropriate (www). The Final Rule also prohibits universal default, but does not include any similar provisions regarding subsequent monitoring of accounts. Another common practice employed by the credit card industry was to apply penalty rates retroactively to prior purchases in response to cardholder behavior that allegedly presented a “greater risk of loss.” For instance, if a cardholder went over their credit limit or made a late payment, the issuer would have automatically increased the cardholder’s rate of interest, and the new interest rate would then be applied to prior purchases that had not yet been paid in full. In 2004, Discover had told its customers that it “reserved the right to look back eleven months for a late payment that would justify the increase” (WWW). Retroactive rate of interest increases were especially harsh in cases where the consumer had a large balance, and proved to be very problematic during the recession as consumers had less available cash. Under the CARD Act, retroactive interest rate increases are prohibited unless a cardholder fails to make a minimum payment within sixty days after the due