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Credit cards may go charging into the past

Norman Hockett didn’t realize that the small plastic rectangle that arrived in his Fresno mailbox in the fall of 1958 put him at the vanguard of the credit revolution.

Fresno was the proving ground for the BankAmericard, the granddaddy of mass market credit cards, and Hockett was one of the first 65,000 people to get one. He used the new tool carefully, never failing to pay off his balance when he bought a TV or a dinner out.

“I have never paid any interest,” said the 78-year-old retired teacher and salesman. “I clear the account every month, and I don’t run up a big bill.”

If the industry -- and its customers -- maintained the prudence of Hockett’s Depression-era upbringing, the new credit card law signed Friday by President Obama might never have been necessary.

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Instead, most people probably have more in common with Barbara and Albert Sanchez, who got their cards decades later, on the other side of Fresno from Hockett and a world away from mid-century attitudes about debt.

The Sanchezes entered a far less regulated credit card system in which Americans faced constant entreaties to take advantage of easy credit. They say the tantalizing opportunities almost led to their financial ruin.

The middle-aged Fresno couple racked up $20,000 on their cards, which helped them maintain their lifestyle after Albert’s overtime at the lumber yard dwindled and Barbara’s housekeeping clients scaled back. They finally sought help from a credit counselor.

“I figured I could deal with it myself, but then I couldn’t do it,” said Barbara Sanchez, 52. “I don’t want to lose my house.”

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In 1958, the Sanchezes might not have qualified for the BankAmericard -- and certainly wouldn’t have been able to rack up tens of thousands in debt. Back then, average customers had a credit limit of $300; “preferred” BofA clients were entitled to carry $500.

Although the new measures set to go into effect early next year won’t roll back Americans’ attitudes toward plastic payment, the latest credit card reform bill seeks to address what consumer advocates have called the most egregious practices. But even those, some credit card watchers say, aren’t enough.

Among other provisions, the new rules will require credit card companies to give more notice before changing clients’ terms such as interest rates, and the issuers won’t be allowed to apply those rates retroactively to existing balances unless the cardholder’s minimum payment is 60 days overdue.

Issuers won’t be allowed to charge interest on bills consumers pay on time, extract extra fees for paying by phone or bank transfer, or issue cards to people under 21 without proof of income or a parent’s signature. And issuers must apply any payment over the minimum to the balance with the highest interest rate.

Banks also won’t be allowed to accept charges that put consumers over their limits.

The American Bankers’ Assn. says that the new regulations fundamentally will change what credit cards are and who will be able to use them.

“It means that there will be less credit available,” said Edward L. Yingling, the trade group’s president. “That means some people will not be able to get a credit card who got it in the past, and those who get the credit card, in some instances, will have a smaller line of credit.”

“We’re turning back the clock to the credit card of the 1960s,” he added. “Everybody paid $25 a year and was charged 18% and it was a very straightforward card, but a lot of people couldn’t qualify, the lines of credit were smaller and those who handled credit well subsidized those with credit issues.”

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Consumer groups, however, say the rules will temper some of the practices that trapped people such as Charles Clark, a 26-year-old medical student from a poor neighborhood on the South Side of Chicago.

Clark didn’t have any experience with credit cards when he got his first piece of plastic, lured by a promotion that gave him an expensive anatomy book for free.

He figured that he was building up his credit as he juggled his finances by charging gas, lab equipment and books while attending Nashville’s Meharry Medical College. Bank of America, which issued his MasterCard, raised his limit about every three months -- proof, he thought, that his strategy was working.

“I thought that as long as I made my payment and never was late, I’d be OK,” Clark said.

But although he was always on time with at least a minimum payment and made sure to stay under his credit limit, Clark soon found himself crossways with the credit card issuer.

“In the old industrial economy, the best client was one who could pay off debts,” said Robert D. Manning, director of a consumer financial center at the Rochester Institute of Technology. “In the post-industrial economy, the best customer is the person who can’t pay it off.”

Clark was a gem. His credit limit was $8,000, and his debt nearly as high.

Then one day, he found that Bank of America had jacked up his interest rate to 15.99% from 7.99%.

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With a phone call to the bank, he learned that the higher rate was triggered when his balance hit about $7,700. Clark protested; he was still under his limit and always paid on time. No matter. The bank said it had sent him a letter warning of the rate change, Clark said. He says he never received it.

Clark’s minimum payment was about $90 before the rate hike. Afterward, it shot up to about $200. Late fees and over-the-credit-limit fees -- at $39 a pop -- added to his burden.

Within a few months, his minimum payment was $688 and his rate kicked up again, to 24.99%. He missed the next month’s payment while waiting for his next student loan check. His minimum payment for the month after that, including late-payment and other fees, soared to $990.

Clark got out of his mess by getting a friend to co-sign a personal loan. He used that to pay off the credit card, which he now reserves for emergencies.

“I would have been OK if they hadn’t changed my rate,” Clark said. “But they put extra weight on and say: Now lift this. It becomes unbearable.”

Bank of America declined to comment on Clark’s case, saying customer privacy concerns prohibit discussion of individual accounts.

But a spokeswoman added that in 2007, when Clark first got into trouble, nearly 94% of its customers had the same or lower rate at the end of the year compared with their rate at the beginning.

The industry, meanwhile, says that tighter rules mean tighter credit -- less charging power for those with blemished records and higher interest rates for almost everyone else.

“The one thing we all agree on is disclosures and making sure the customer understands what the pricing is and making it simpler,” said Richard Struthers, the head of BofA’s global card services.

But to judge from today’s promotional materials, the last thing credit card companies want is for consumers to understand what they’re getting into, said Patricia McCoy, who teaches consumer finance law at the University of Connecticut Law School.

“The lending industry has accomplished disclosures that satisfy the law and totally obfuscate what people need to know,” she said. “The disclosures are an utter failure -- at least in the consumer’s eye and this law professor’s eye.”

The new rules also hope to offer some additional clarity, although consumer advocates say this effort, as well, doesn’t go far enough.

For many people, credit card catastrophes have become the more democratic cousin of the mortgage meltdown; with no house needed, people like Clark got in over their heads.

“The problem isn’t individual practices. It’s a structural problem with credit cards,” said Adam J. Levitin, an associate professor at the Georgetown University Law Center and an expert in bankruptcy and the credit card industry. “It’s impossible to know in advance what it will cost to carry a balance on a credit card.”

And, Levitin added, the new legislation does little to change that.

Indeed, banks still will be allowed a host of practices that are anti-consumer and just plain unfair, Manning said. These practices include:

* No caps on interest rates or on fees for transfers, late payments or going over a spending limit.

* No way to ensure on-time payment. New rules mandate that payments be due at least 21 days after a statement is mailed, but Manning said it would be more fair to adopt a postmark standard, whereby payments are deemed on time if mailed by the date specified.

* No curb on credit line reductions or capricious closing of accounts.

* No mandate against what consumer advocates call “behavioral profiling,” Manning said. Start shopping at Wal-Mart after years of buying at department stores? Charge a large quantity of alcohol -- just for a friend’s party? Take out a subprime mortgage? To some banks, those have been signs that a customer’s finances are hitting the rocks, Manning said -- and reason enough to reduce the customer’s line of credit.

And those are just some of the shortcomings of the new measures, reform advocates said.

“This legislation deals with today’s problems, not tomorrow’s, and it doesn’t set up a framework for dealing with tomorrow’s problems,” Levitin said.

Research conducted by a team including Elizabeth Warren, a Harvard Law School professor and consumer debt expert, suggests that people who fall into serious debt tend to do so because of a harsh roll of the dice -- job loss, illness, divorce -- and not profligate spending.

“This is not that people go out each month and buy too many iPods or other crazy things,” said Warren, whose 2001 study was based on an analysis of bankruptcy filings. “It’s that they spent so much of their salary on the basics -- mortgage, child care, college tuition, health insurance, whatever -- that month after month they end up short on day-to-day living. They can’t do it anymore.”

In Fresno, the Sanchezes say they first ran up their credit card debt making repairs and necessary improvements on their 1,200-square-foot home. Paying off that debt seemed reasonable given the couple’s good jobs and capacity for hard work.

But once the economy soured, the Sanchezes both faced a reduction in their hours.

They’ve entered a credit counseling program with ByDesign Financial Solutions, which set up a payment plan with their creditors and negotiated a lower interest rate until their bills are settled.

When that day comes, Albert Sanchez expects to start charging things again.

“You have to have one card or you can’t get anything,” he said. “The counselor told us that once we pay it all off, the companies will send us another card automatically.”

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Times researcher Scott J. Wilson contributed to this report.


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