After the federal Credit CARD Act went into effect last Monday, a similar bill focusing specifically on students has also hit the floor of the Wisconsin state Senate. Despite the goodwill behind it, the bill's content, which is similar to its federal counterpart's, brings up the question of legislative redundancy. Meanwhile, there are many other ways to protect holders of both credit and debit cards. If the intention of lawmakers goes beyond a mere nod to the federal government's sweeping reform, exploring initiatives in these areas will be more worthwhile.
The Senate bill has two key elements. Banks could no longer induce college students to sign a credit card contract by offering tangible items such as T-shirts. If students are under 21, they would either need a cosigner or have to prove their own ability to make monthly payments.
Interestingly, these rules are also part of the federal Credit Card Accountability Responsibility and Disclosure Act. Besides those rules, the act goes on to offer probably the most effective protection to cardholders: If a transaction will take you over your credit limit, the card company will have to turn it down unless you have a prior agreement with them to allow overdrafts. As we can see here, it has already covered all the main issues addressed in the state bill.
Now one thing to note is that even with the Credit CARD Act, holders are not guaranteed a safe harbor. After it was passed, banks raised their interest rates in droves. For example, the so-called ""best student credit card,"" the Citi Forward Card for College Students, currently has a variable interest rate that may go above 17 percent. This immediately imposes a formidable burden on anyone who dares to lose track of their account. If state reforms in this regard already look past due, there are areas where the Legislature could still make a difference. One big problem is how little card holders are informed about their credit cards. What is its interest rate? Its grace period? Does it come with overdraft protection? Unless you go the extra mile to seek answers, these questions will be totally omitted in your banker's glazed talk. It's not until a red balance sheet chases you down that you taste the dirty side of the credit card business. If state lawmakers could mandate the effective delivery of basic information about credit cards, card holders, especially college students who are among the most vulnerable to freebies, could avoid many losses.
Another area Wisconsin could look at is debit cards. Contrary to popular belief, they are much riskier than credit cards. When consumers sign up for a debit card, one thing left out of the warm Q and A session is overdraft protection. It issues the cardholder an instant loan if the account is overdrawn.
But if the balance is not paid off quickly, people would still have to pay the high overdraft fee. Currently the overdraft policy varies from bank to bank. Many banks do not provide the protection that comes automatically with the contract. Holders have to ask for it or make sure the bank does not allow overdraft at all. Many consumers are not aware of this function, and banks hardly give out such important information voluntarily.
On the other hand, even if a debit account is not overdrawn, holders could find it impossible to complete transactions or worse still, we end up bouncing checks. This is nerve-racking for any consumer. If you have only $50 on your debit card and you're pumping in $10 of gas, a sixty dollar block before the transaction begins could immediately plunge your account into the overdraft bog. Again, nothing has been done about it.
Calls for debit-card reform are becoming louder, especially after the passage of the Credit CARD Act. But no major moves have been taken so far. In fact, issues on overdraft protection and transaction processing all deserve lawmakers' second thought.
If state lawmakers look beyond the new Credit CARD Act, they will find many more concerns that still remain to be addressed. The federal act should just be a catalyst for the local government. I am expecting more in-depth answers.
Qi Gu is a junior majoring in journalism. We welcome any and all feedback. Please send responses to opinion@dailycardinal.com.
