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34–409 PDF 2007

S. Hrg. 110–76

CREDIT CARD PRACTICES: FEES, INTEREST

CHARGES, AND GRACE PERIODS

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 7, 2007

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOHN E.SUNUNU, New Hampshire

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

BARACK OBAMA, Illinois 

CLAIRE McCASKILL, Missouri 

JON TESTER, Montana 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire

ELISE J. BEAN, Staff Director and Chief Counsel 

JULIE DAVIS, Counsel to Senator Carl Levin 

ZACHARY I. SCHRAM, Counsel 

KATE BITTINGER, GAO Detailee 

MARK L. GREENBLATT, Staff Director and Chief Counsel to the Minority 

MARK D. NELSON, Deputy Chief Counsel to the Minority 

TIMOTHY R. TERRY, Counsel to the Minority 

MARY D. ROBERTSON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1

Senator Coleman .............................................................................................. 8

Senator Warner ................................................................................................ 13

Senator Carper ................................................................................................. 40

Prepared statement: 

Senator Collins ................................................................................................. 61

WITNESSES 

WEDNESDAY, MARCH 7, 2007

Wesley Wannemacher, Consumer, Lima, Ohio ..................................................... 14

Alys Cohen, Staff Attorney, National Consumer Law Center ............................. 16

Bruce L. Hammonds, President, Bank of America Card Services, Bank of 

America Corporation, Wilmington, Delaware .................................................... 28

Richard J. Srednicki, Chief Executive Officer, Chase Bank USA, N.A., Wilmington, Delaware ............................................................................................... 30

Vikram A. Atal, Chairman and Chief Executive Officer, Citi Cards, Global 

Consumer Group, Citigroup Inc., New York, New York ................................... 32

ALPHABETICAL LIST OF WITNESSES

Atal, Vikram A.: 

Testimony .......................................................................................................... 32

Prepared statement .......................................................................................... 128

Cohen, Alys: 

Testimony .......................................................................................................... 16

Prepared statement with an attachment ....................................................... 64

Hammonds, Bruce L.: 

Testimony .......................................................................................................... 285

Prepared statement with attachments ........................................................... 81

Srednicki, Richard J.: 

Testimony .......................................................................................................... 304

Prepared statement .......................................................................................... 115

Wannemacher, Wesley: 

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 62

EXHIBITS 

1. Summary of Wannemacher Account, chart prepared by the Permanent 

Subcommittee on Investigations ...................................................................... 134

2. Example of Interest Charges on Credit Card Debt That Is Paid On Time 

But Not In Full, chart prepared by the Permanent Subcommittee on 

Investigations .................................................................................................... 135

3. a. Bank of America Billing Statement Disclosures ....................................... 136

3. b. Chase Bank Billing Statement Disclosures ............................................... 137

3. c. Citigroup Billing Statement Disclosures .................................................... 138

4. Wannemacher Account Transactions, March 2001-February 2007, prepared by the Permanent Subcommittee on Investigations ........................... 139

5. Wannemacher Credit Card Account, prepared by the Permanent Subcommittee on Investigations ............................................................................ 141

Page

IV

6. U.S. Government Accountability Office (GAO) Report to the Ranking 

Minority Member, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, United States 

Senate, CREDIT CARDS—Increased Complexity in Rates and Fees 

Heightens Need for More Effective Disclosures to Consumers, September 

2006, GAO–06–929 ........................................................................................... 142

7. a. Responses to supplemental questions for the record submitted to Bruce 

L. Hammonds, President, Bank of America Card Services, Bank of 

America Corporation ................................................................................... 255

7. b. SEALED EXHIBIT: List of public universities and colleges with whom 

Bank of America has sponsorship agreements .......................................... *

8. a. Responses to supplemental questions for the record submitted to Richard J. Srednicki, Chief Executive Officer, Chase Bank USA, N.A. ......... 292

8. b. SEALED EXHIBIT: List of public universities and colleges with whom 

Chase Bank has sponsorship agreements ................................................. *

9. Responses to supplemental questions for the record submitted to Vikram 

A. Atal, Chairman and Chief Executive Officer, Citi Cards, Global Consumer Group, Citigroup Inc. ............................................................................ 296

10. Responses to questions for the record submitted to Jud Linville, President, U.S. Consumer Card Services Group, American Express .................... 301

11. Responses to questions for the record submitted to Jory Benson, President, US Card, Capital One ............................................................................. 306

12. Responses to questions for the record submitted to David W. Nelms, 

Chairman, Discover Financial Services, Inc. .................................................. 311

13. a.–m. Excerpts from correspondence sent by more than 1,000 persons 

nationwide in response to the Subcommittee investigation into unfair credit card practices ....................................................................... 318

(1)

1See Exhibit 1 which appears in the Appendix on page 134. 

CREDIT CARD PRACTICES: FEES, INTEREST 

CHARGES, AND GRACE PERIODS 

WEDNESDAY, MARCH 7, 2007

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:03 a.m., in 

room 342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin, Carper, McCaskill, Coleman, Warner, 

and Sununu. 

Staff Present: Elise J. Bean, Staff Director and Chief Counsel; 

Mary D. Robertson, Chief Clerk; Julie Davis, Counsel to Senator 

Levin; Kate Bittinger, Detailee, GAO; Zack Schram, Counsel; Teresa Meoni, Intern; Leslie Garthwaite, Law Clerk; Peggy Gustafson 

(Senator McCaskill); Christine Sharp, Derek Freeman, and Price 

Feland (Senator Pryor); Hilary Jochmans (Senator Carper); Mark 

L. Greenblatt, Staff Director and Chief Counsel to the Minority; 

Mark D. Nelson, Deputy Chief Counsel to the Minority; Timothy R. 

Terry, Counsel to the Minority; Michael P. Flowers, Counsel to the 

Minority; Sharon Beth Kristal, Counsel to the Minority; Clifford C. 

Stoddard, Jr., Counsel to the Minority; Emily T. Germain, Staff Assistant to the Minority; Robin Landauer (Senator Coburn); John 

Frierson and Hughes Bates (Senator Warner); Clark Irwin, Melvin 

Albritton (HSGAC); and Adam Hechavarria (Senator Sununu). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. In 2001 and 2002, 

Wesley Wannemacher, our first witness this morning, used a new 

credit card to pay for expenses mostly related to his wedding. He 

charged a total of about $3,200, which exceeded the card’s limit by 

$200. He spent the next 6 years trying to pay off the debt, averaging payments of about $1,000 a year. 

As of last month he had paid about $6,300 on his $3,200 debt, 

but his February billing statement showed that he still owed 

$4,400. 

Now how is it possible that a man pays $6,300 on a $3,200 credit card debt, but still owes $4,400? Here is how. Take a look at Exhibit 1.1

2

1See Exhibit 2 which appears in the Appendix on page 135. 

On top of the $3,200 debt, Mr. Wannemacher was charged by the credit card issuer about $4,900 in interest, $1,100 in late fees, and 

$1,500 in over-the-limit fees. He was hit 47 times with over-thelimit fees, even though he went over-the-limit only three times and 

exceeded the limit by only $200. So for going over-the-limit by 

$200, he was hit with $1,500 in over-the-limit fees. 

Altogether, these fees and the interest charges added up to $7,500 which, on top of the original $3,200 credit card debt, produced total charges to him of $10,700. In other words, the interest 

charges and fees more than tripled the original $3,200 credit card 

debt, despite payments by the cardholder averaging $1,000 per 

year. 

Unfair? Clearly unfair, I think. But our investigation has shown 

that sky high interest charges and fees are not uncommon in the 

credit card industry. 

While the Wannemacher account happened to be at Chase, penalty interest rates and fees are also employed by Bank of America, 

Citigroup, and other major credit card issuers. Last week Chase decided to forgive the remaining debt on the Wannemacher account. 

While that is good news for the Wannemacher family, that decision 

does not resolve the problem of excessive credit card fees and sky 

high interest rates that trap too many hard-working families into 

a downward spiral of debt. 

Today we are focusing on industry practices affecting three fundamental aspects of credit cards: grace periods, interest rates, and 

fees. 

After an investigation that required digging into the details of 

complex billing records, unfair, little known, and hidden industry 

practices emerged which squeezed not only the consumers struggling to repay debt but also hit those with accounts in good standing. 

Start with grace periods. Many consumers think that credit cards 

provide them with a grace period before interest is charged. Not always true. If you owe money on your card from the prior month, 

there is no grace period on new purchases. Each of those purchases 

racks up interest charges from day one. And today, 50 percent to 

60 percent of U.S. cardholders carry unpaid balances. They do not 

get a grace period on their purchases. I wonder how many working 

families understand that. 

Interest is another key issue. Our investigation found that even 

accounts in good standing are socked unfairly by little known credit 

card industry practices that inflate interest rates for millions of 

consumers. Take a look at Exhibit 2.1

Suppose a consumer who usually pays their account in full and 

owes no money on December 1, makes a lot of purchases in December, and gets a January 1 credit card bill for $5,020. That bill is 

due on January 15. Suppose the consumer pays that bill on time, 

but pays $5,000 instead of the full amount owed, which was $5,020. 

Now what do you think the consumer owes on the next bill? If you thought that the next bill would be the $20 past due plus interest on the $20 past due, you would be wrong. In fact, under industry practice today, the bill would likely be twice as much as that. 

3

1See Exhibit 2 which appears in the Appendix on page 135. 

And that is because the consumer would have to pay interest, not 

just on the $20 that was not paid on time, but also on the $5,000 

that was paid on time. 

In other words, the consumer would have to pay interest on the entire $5,020 from the first day of the billing month, January 1, 

until the day the bill was paid on January 15, and that interest 

is compounded daily. So much for the grace period. In addition, the consumer would have to pay the $20 past due plus interest on the $20 from January 15 to January 31, again 

compounded daily. In our example, using an interest rate of 17.99 

percent, the same rate used on Mr. Wannemacher’s account before 

he got into trouble, the $20 debt would in one month rack up about 

$35 in interest charges and balloon into a debt of $55.21. 

Now you might ask, hold on, why does a consumer have to pay any interest at all on the $5,000 that was paid on time? Why does 

anyone have to pay interest on a portion of a debt that was paid 

by the date specified in the bill, in other words on time? The answer is because that is how the credit card industry has operated 

for years, and they have gotten away with it. 

There is more. You might think that once the consumer gets gouged in February, paying $55.21 on a $20 debt and pays that 

debt on time and in full, without making any new purchases, that 

would be the end of it. But you would be wrong again. It is not 

over. Look again at our example in Exhibit 2.1

Even though on February 15 the consumer paid the February bill in full and on time, all $55.21, the next bill has an additional interest charge on it for what we call trailing interest. In this case the 

trailing interest is the interest that accumulated on the $55.21 

from February 1 to February 15, which is the time period from the 

day when the bill was sent to the day that it was paid. The total 

is 38 cents. While some issuers will waive trailing interest if the 

next month’s bill is less than a dollar if a consumer makes a new 

purchase, which is typical, a common industry practice is to fold 

the 38 cents into the end-of-the-month bill reflecting the new purchase. 

Now 38 cents is not much in the big scheme of things. That may 

be why many consumers do not notice these types of extra interest 

charges or try to fight them. Even if someone had questions about 

the amount of interest on a bill, most consumers would be hard 

pressed to understand how the amount was calculated, much less 

whether it was incorrect. But by nickel and diming tens of millions 

of consumer accounts, credit card issuers reap large profits. 

Some of the questions then that we want to examine today are 

whether it is fair to make consumers pay interest on debt which 

they pay on time, whether it is fair to charge trailing interest when 

a bill is paid on time and in full, and whether it is fair to assess 

interest in such convoluted, opaque ways that make it nearly impossible for consumers to figure out what is happening to them. 

In addition, it used to be that credit cards offered a single fixed 

interest rate. That is not true anymore. Recently the Government 

Accountability Office, the GAO, prepared a report examining the 

interest rates and fees being applied to 28 popular credit cards 

4

1See Exhibit 6 which appears in the Appendix on page 142. 

issued by the six largest credit card companies.1 GAO found that 

today credit card issuers typically apply multiple interest rates to 

the same card. 

For example, the credit card industry typically uses one interest 

rate for cash advances, another for regular purchases, and a third 

for balance transfers. And if a card holder pays late or exceeds a 

credit limit, they can substitute a so-called penalty interest rate 

that can exceed 30 percent. All of these interest rates can also vary 

with some frequency since many credit card issuers use interest 

rates that rise and fall with the prime rate. 

The use of multiple interest rates that change over time makes 

it nearly impossible for consumers to track their finance charges or 

even know beforehand what interest rates will apply to their card 

in a specific month. Today most consumers find out their interest 

rates when they get their billing statements, after they have made 

their purchases or obtained a cash advance. 

There is also a recent trend towards higher interest rates. When 

the GAO examined data provided by the six largest credit card 

issuers, it found a dramatic increase over 2 years in the number 

of credit card accounts with higher interest rates. For example, 

from 2003 to 2005, the number of accounts subject to interest rates 

greater than 25 percent doubled, from 5 percent to 11 percent of 

all accounts. The number of accounts subject to the three highest 

interest rates also doubled, going from 29 percent to 57 percent. 

That means that, in 2005, 57 percent of the accounts at the six 

largest credit card issuers had interest rates from 15 percent to 

more than 30 percent. 

The bottom line is this, that the use of multiple and variable interest rates, together with anti-consumer payment allocation rules, 

confuse consumers about what interest rates apply to what debts 

when. The disclosures on calculating interest rates are so complicated that virtually no average consumer can understand them. 

But the consequences of industry practice on industry rates go 

deeper than inadequate disclosure and consumer confusion. In 

some cases consumers become overwhelmed with penalty interest 

charges that can double or triple the size of their debt and make 

it nearly impossible for them to pay their bills. Equally disturbing 

are the interest charges that are quietly added to accounts in good 

standing, inflating the outstanding balances often without the credit card holder realizing it. 

And finally, on the issue of fees, the GAO report identified a host 

of fees imposed by the credit card industry. The GAO found that 

late fees now average $34 per month, while over-the-limit fees average $31 per month. Some credit card issuers also have policies 

that allow them to impose over-the-limit fees repeatedly. In Mr. 

Wannemacher’s case, although his purchases exceeded the limit 

just three times, for a total of $200, he was charged over-the-limit 

fees 47 times and paid $1,500 on his $200 over-the-limit amount. 

I think that is unfair gouging. 

Another common fee which I call pay-to-pay is the $5 to $15 that 

issuers charge consumers to pay their credit card bill over the teleVerDate 0ct 09 2002 10:41 Nov 07, 2007 Jkt 034409 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\34409.TXT SAFFAIRS PsN: PAT
5

phone. To me, charging folks a fee to pay their bills—again we are 

talking about people paying their bills on time—is a travesty. 

Excessive and abusive fees are then made worse by the industry 

practice of including all fees in a consumer’s outstanding balance 

so that they, too, incur added interest. In other words, the higher 

the fees, the higher the balances owed, and the higher the interest 

charges. 

It is sometimes high penalty fees and interest charges rather 

than purchases that push a consumer over a credit limit, triggering 

more penalties and deeper debt. 

Credit card issuers sometimes say that they are engaged in a 

risky business, lending unsecured debt to millions of consumers, 

and that is why they have to price their product so high. But the 

data shows that typically 95 percent to 97 percent of U.S. cardholders pay their bills, and it is clear that credit card issuers 

charge interest and fees in ways that produce enormous profit. For 

the last decade, credit card issuers have reported year after year 

of solid profits, maintained their position as the most profitable 

sector in the consumer lending field, and reported consistently 

higher rates of return than do commercial banks. 

Credit card issuers make such a hefty profit that last year they 

sent out 8 billion pieces of mail soliciting people to sign up. 

With profits like those, credit card issuers can afford to stop unfairly charging interest on debt that is paid on time, stop forcing 

consumers to pay for the balances with the lowest interest rates 

first, stop charging consumers a fee to pay their bills, and stop imposing abusive fees and excessive penalty interest rates. 

As one Michigan businessman expressed it to the Subcommittee, 

‘‘I don’t blame the credit card issuers for putting me into debt, but 

I do blame them for keeping me there.’’ 

To examine these issues in greater detail, we are going to hear 

today from both consumers and the three largest issuers of credit 

cards in America. Together Bank of America, Chase, and Citigroup 

administer over 200 million credit card accounts. Each of these 

banks, as well as others that we have contacted, have cooperated 

with the Subcommittee’s inquiry and we appreciate that cooperation. 

Recently some banks have also taken steps to improve their credit card practices, including Chase’s recent decision to stop collecting 

the added interest charges involved in double cycle billing. But 

much more needs to be done. 

Finally, I want to thank the Subcommittee’s Ranking Republican, Norm Coleman, and his staff, who have worked so hard to 

examine these issues with us. I now turn to Senator Coleman for 

an opening statement. 

[The prepared statement of Senator Levin follows:]

PREPARED OPENING STATEMENT OF SENATOR LEVIN 

In 2001 and 2002, Wesley Wannemacher, our first witness this morning, used a 

new credit card to pay for expenses mostly related to his wedding. He charged a 

total of about $3,200, which exceeded the card’s credit limit by $200. He spent the 

next six years trying to pay off the debt, averaging payments of about $1,000 per 

year. As of last month, he’d paid about $6,300 on his $3,200 debt, but his February 

billing statement showed he still owed $4,400. 

How is it possible that a man pays $6,300 on a $3,200 credit card debt, but still 

owes $4,400? Here’s how. Take a look at this chart. On top of the $3,200 debt, Mr. 

6

Wannemacher was charged by the credit card issuer about $4,900 in interest, $1,100 

in late fees, and $1,500 in over-the-limit fees. He was hit 47 times with over-limit 

fees, even though he went over the limit only 3 times and exceeded the limit by only 

$200. Altogether, these fees and the interest charges added up to $7,500 which, on 

top of the original $3,200 credit card debt, produced total charges to him of $10,700. In other words, the interest charges and fees more than tripled the original $3,200 credit card debt, despite payments by the cardholder averaging $1,000 per year. Unfair? Clearly, I think, but our investigation has shown that sky-high interest 

charges and fees are not uncommon in the credit card industry. While the 

Wannemacher account happened to be at Chase, penalty interest rates and fees are 

also employed by Bank of America, Citigroup, and other major credit card issuers. 

Last week, Chase decided to forgive the remaining debt on the Wannemacher account, and while that is good news for the Wannemacher family, that decision 

doesn’t begin to resolve the problem of excessive credit card fees and sky-high interest rates that trap too many hard-working families into a downward spiral of debt. 

Credit cards are more and more a fixture of U.S. economic life. People use them 

to buy groceries, rent a car, even pay their taxes. They use credit cards to buy goods 

on the Internet, and obtain capital for small business ventures. Credit cards provide 

individuals with a readily accepted payment mechanism, ready access to credit, and 

the means to manage their finances. In 2005, with an average of 5 cards per household, U.S. families used over 690 million credit cards to buy goods and services 

worth $1.8 trillion. 

But credit cards have also brought problems. They have contributed to record 

amounts of household debt. They have made it common for working families to be 

hit with interest rates of 25 percent, 30 percent, or more. They have brought families to their knees with excessive late and over-limit fees, making it harder for them 

to climb out of debt. When I announced the Subcommittee investigation into credit 

card practices, my office began receiving hundreds of communications from Americans angry at how they’d been treated by their credit card issuers and identifying 

a host of practices they view as unfair. 

Today we are focusing on industry practices affecting three fundamental aspects 

of credit cards—grace periods, interest rates, and fees. After an investigation that 

required digging into the details of complex billing methods, unfair, little known, 

and hidden industry practices emerged which squeeze not only the consumers struggling to repay debt, but also hit those with accounts in good standing. 

Take grace periods. Many consumers think that credit cards provide them with 

a grace period before interest is charged. Not true. If you owe money on your card 

from the prior month, there is no grace period on new purchases—each of those purchases racks up interest charges from day one. Today, 50-60 percent of U.S. cardholders carry unpaid balances; they don’t get a grace period on any of their purchases. I wonder how many working families understand that. 

Interest is another key issue. Our investigation found that even accounts in good 

standing are socked unfairly by little known credit card industry practices that inflate interest charges for millions of consumers. Take a look at Chart No. 2. Suppose 

a consumer who usually pays their account in full, and owes no money on December 

1st, makes a lot of purchases in December, and gets a January 1 credit card bill 

for $5,020. That bill is due January 15. Suppose the consumer pays that bill on 

time, but pays $5,000 instead of the full amount owed. What do you think the consumer owes on the next bill? 

If you thought the bill would be the $20 past due plus interest on the $20, you 

would be wrong. In fact, under industry practice today, the bill would likely be twice 

as much. That’s because the consumer would have to pay interest, not just on the 

$20 that wasn’t paid on time, but also on the $5,000 that was paid on time. In other 

words, the consumer would have to pay interest on the entire $5,020 from the first 

day of the billing month, January 1, until the day the bill was paid on January 15, 

compounded daily. So much for a grace period. In addition, the consumer would 

have to pay the $20 past due, plus interest on the $20 from January 15 to January 

31, again compounded daily. In our example, using an interest rate of 17.99 percent, 

the same rate used on Mr. Wannemacher’s account before he got into trouble, the 

$20 debt would, in one month, rack up $35 in interest charges and balloon into a 

debt of $55.21. 

You might ask why does the consumer have to pay any interest at all on the 

$5,000 that was paid on time? Why does anyone have to pay interest on the portion 

of a debt that was paid by the date specified in the bill—in other words, on time? 

The answer is, because that’s how the credit card industry has operated for years, 

and they have gotten away with it. 

There’s more. You might think that once the consumer gets gouged in February, 

paying $55.21 on a $20 debt, and pays that bill on time and in full, without making 

7

any new purchases, that would be the end of it. But you would be wrong again. It’s 

not over. 

Look again at our example in Chart No. 2. Even though, on February 15, the con- sumer paid the February bill in full and on time—all $55.21—the next bill has an 

additional interest charge on it, for what we call ‘‘trailing interest.’’ In this case, the 

trailing interest is the interest that accumulated on the $55.21 from February 1 to 

15, which is time period from the day when the bill was sent to the day when it 

was paid. The total is 38 cents. While some issuers will waive trailing interest if 

the next month’s bill is less than $1, if a consumer makes a new purchase, a common industry practice is to fold the 38 cents into the end-of-month bill reflecting 

the new purchase. Now 38 cents isn’t much in the big scheme of things. That may 

be why many consumers don’t notice these types of extra interest charges or try to 

fight them. Even if someone had questions about the amount of interest on a bill, 

most consumers would be hard pressed to understand how the amount was calculated, much less whether it was incorrect. But by nickel and diming tens of millions of consumer accounts, credit card issuers reap large profits. Some of the questions we want to examine today are whether it is fair to make consumers pay interest on debt which they pay on time, whether it is fair to charge trailing interest 

when a bill is paid on time and in full, and whether it is fair to assess interest in 

such convoluted, opaque ways that make it nearly impossible for consumers to figure out what is happening to them. 

In addition, it used to be that credit cards offered a single fixed interest rate. 

That’s not true anymore. Recently, the Government Accountability Office (GAO) prepared a report examining the interest rates and fees being applied to 28 popular 

credit cards issued by the six largest credit card issuers. GAO found that, today, 

credit card issuers typically apply multiple interest rates to the same card. For example, the credit card industry typically uses one interest rate for cash advances, 

another for regular purchases, a third for balance transfers, and if a cardholder pays 

late or exceeds a credit limit, may substitute a so-called penalty interest rate that 

can exceed 30 percent. All of these interest rates can also vary with some frequency, 

since many credit card issuers use interest rates that rise and fall with the prime 

rate. 

The use of multiple interest rates that change over time makes it nearly impossible for consumers to track their finance charges or even to know beforehand what 

interest rates will apply to their card in a specific month. Today, most consumers 

find out their interest rates when they get their billing statements—after they’ve 

made their purchases or obtained a cash advance. 

There is also a recent trend toward higher interest rates. When GAO examined 

data provided by the six largest credit card issuers, it found a dramatic increase 

over two years in the number of credit card accounts with higher interest rates. For 

example, from 2003 to 2005, the number of accounts subject to interest rates greater 

than 25 percent doubled, from 5 percent to 11 percent of all accounts. The number 

of accounts subject to the three highest interest rates also doubled, going from 29 

percent to 57 percent. That means, in 2005, 57 percent of the accounts at the six 

largest credit card issuers had interest rates from 15 percent to more than 30 percent. 

Credit card issuers like to point out that they often offer new customers very low 

introductory interest rates, such as 0 or 1 percent. But these rates are the ‘‘come 

on’’ rates, are usually limited to short time periods, and may apply only to a balance 

transferred from another card. If a cardholder pays late or exceeds the credit limit, 

the introductory rate may be immediately replaced with a much steeper rate. In 

some cases, if the cardholder makes new purchases, those purchases are charged a 

higher interest rate and can’t be paid off until the entire balance at the lower rate 

is repaid. That’s because there is an industry wide practice of requiring all consumer payments to be allocated first to the balances with the lowest interest rates. 

The bottom line is that use of multiple and variable interest rates, together with 

anti-consumer payment allocation rules, confuse consumers about what interest 

rates apply to what debts when. The disclosures on calculating interest rates are 

so complicated that virtually no average consumer can understand them. 

But the consequences of industry practice on interest rates go deeper than inadequate disclosure and consumer confusion. In some cases, consumers become overwhelmed with penalty interest charges that can double or triple the size of their 

debt, and make it nearly impossible for them to pay their bills. Equally disturbing 

are the interest charges that are quietly added to accounts in good standing, inflating the outstanding balances often without the cardholder realizing it. Finally, there 

is the issue of fees. GAO’s report identified a host of fees imposed by the credit card 

industry. GAO found that late fees now average $34 per month, while over-limit fees 

average $31 per month. Some credit card issuers also have policies that allow them 

8

to impose over-limit fees repeatedly. In Mr. Wannemacher case, although his purchases exceeded the limit just three times for a total of $200, he was charged overlimit fees 47 times and paid $1,500. Talk about unfair gouging. 

Another common fee, which I call pay to pay, is the $5-15 fee that issuers charge 

consumers to pay their credit card bill over the telephone. To me, charging folks a 

fee to pay their bills—again we’re talking about people paying their bill on time—

is a travesty. Excessive and abusive fees are then made worse by the industry practice of including all fees in a consumer’s outstanding balance so that they incur 

added interest. In other words, the higher the fees, the higher the balances owed, 

and the higher the interest charges. It is sometimes high penalty fees and interest 

charges, rather than purchases, that push a consumer over a credit limit, triggering 

still more penalties and deeper debt. 

Credit card issuers like to say that they are engaged in a risky business, lending 

unsecured debt to millions of consumers, and that’s why they have to price their 

products so high. But the data shows that, typically, 95 to 97 percent of U.S. cardholders pay their bills. And it is clear that credit card issuers charge interest and 

fees in ways that produce enormous profit. For the last decade, credit card issuers 

have reported year after year of solid profits, maintained their position as the most 

profitable sector in the consumer lending field, and reported consistently higher 

rates of return than commercial banks. Credit card issuers make such a hefty profit 

that they sent out 8 billion pieces of mail last year soliciting people to sign up. 

With profits like those, credit card issuers can afford to stop unfairly charging interest on debt that is paid on time, stop forcing consumers to pay for the balances 

with the lowest interest rates first, stop charging consumers a fee to pay their bills, 

and stop imposing abusive fees and excessive penalty interest rates. As one Michigan businessman expressed it to the Subcommittee, ‘‘I don’t blame the credit card 

issuers for putting me into debt, but I do blame them for keeping me there.’’

To examine these issues in greater detail, we are going to hear from both consumers and the three largest issuers of credit cards in America today. Together, 

Bank of America, Chase, and Citigroup administer over 200 million credit card accounts. Each of these banks, as well as others we have contacted, has cooperated 

with the Subcommittee’s inquiry, and we appreciate that cooperation. Recently, 

some banks have also taken steps to improve their credit card practices, including 

Chase’s recent decision to stop collecting the added interest charges involved in double cycle billing. But more needs to be done. 

Finally, I would like to thank the Subcommittee’s Ranking Republican, Norm 

Coleman, and his staff, who have worked hard to examine these issues with us. I’d 

like to turn to him now for an opening statement.

Senator LEVIN. Senator Coleman. 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. Thank you, Mr. Chairman. 

Mr. Chairman, let me start by thanking you not only for initiating this examination into certain credit card industry practices 

but also more broadly for your continued and tireless advocacy on 

behalf of the American consumer. You have a long and distinguished history of looking out for the little guy, and this hearing 

is an important part of that very laudable record. So I do want to 

say thank you. 

Credit card debt is often seen as a very personal problem, but the 

burgeoning level of household debt in America has implications for 

the entire Nation. Over the past 25 years, U.S. debt has ballooned 

from a collective $59 billion in 1980 to approximately $830 billion 

in the year 2005. 

Even more staggering, the number of consumers filing for bankruptcy has increased by 609 percent. These figures have far-reaching implications. Too many Americans across all economic strata 

are saddled with high interest payments on consumer debt, impeding them from accumulating wealth and achieving their financial 

goals, including sending children to college and saving money for 

retirement. 

9

This inquiry today falls squarely in line with the Subcommittee’s 

long tradition of investigations designed to protect the American 

consumer. During my tenure as Chairman, this Subcommittee conducted similar bipartisan, consumer protection inquiries that uncovered unconscionable, often criminal, schemes in the refund anticipation loan and credit counseling industries. Those investigations exposed how many low income Americans become mired in 

debt and pay usurious interest rates and exorbitant fees to unscrupulous lenders who exploit their lack of access to low-cost lending. 

Although the practices at issue today are not criminal schemes, 

they clearly have had a devastating impact on the many families 

who are mired in debt. And credit opportunities that look like a 

helping hand actually become snares that sink the consumer into 

further depths of debt. 

High interest rates, hefty fees, and crippling penalties impede 

more and more hard-working families from pursuing the American 

dream. This problem is only compounded by the often intractable 

and jargoned disclosures of credit card terms, which are impenetrable to the average consumer. Too many families, not surprisingly, feel that the credit system is rigged against them, and it is 

time the industry cleaned up its act. 

It is not lost on me that over the past 20 years the credit card 

industry has created financial opportunities for countless Americans by extending credit to a far broader pool of borrowers than 

other lenders, including many high-risk borrowers who would not 

otherwise have access to credit. But with these increased opportunities have also come greater complexity and greater vulnerability. 

Credit cards are no longer one-size-fits-all and not every borrower knows, or is even told, which is the best, most affordable 

card for their particular needs. Interest rates can increase in a moment’s notice, interest charges grow by leaps and bounds, and the 

credit that once promised economic opportunity all too often portends financial ruin. 

In light of these fundamental market changes and the growing 

complexity of credit card terms, we need to do more and take a 

closer look at certain industry practices, including the adequacy of 

disclosure, the application of high penalty interest rates to previous 

credit card balances, and the issue of trailing or residual interest 

which the Chairman has discussed. 

The disclosures contained in credit card agreements are written 

by and for lawyers with an eye more toward staving off litigation 

rather than educating consumers. Too often consumers are caught 

unaware by important terms buried deep inside dense, fine-print 

contacts, replete with interminable sentences and complex jargon. 

For example, one credit card disclosure offers us the following: 

‘‘For each balance, the Balance Subject to Finance Charge on the 

statement is the average of the daily balances during the billing 

period. If you multiply this figure for each balance by the number 

of days in the billing period by the applicable daily periodic rate, 

the result is the periodic finance charges assessed for that balance, 

except for minor variations caused by rounding.’’ 

After wading through that morass, it should come as no surprise 

to learn that the GAO recently reported that disclosures are sometimes written at the 27th-grade level. I can only assume that one 

10

would need, after 12 years of grade school and 4 years of college, 

a 4-year medical degree, a 5-year Ph.D., and a 2-year MBA to fully 

grasp those particular provisions. 

Former Supreme Court Justice Louis Brandeis got it right when 

he said ‘‘Sunlight is the best disinfectant.’’ My fear is that the average credit card’s complexity has vitiated the traditional disclosure’s 

effectiveness, and consumers are being left in the dark. In many 

ways, the Schumer Box, which is the box that you see on the forms 

that is supposed to describe terms and conditions, has more accurately become or needs to become the Schumer Pamphlet. That 

does not make sense. 

We must all work to ensure that disclosures are made in a userfriendly, common-sense, straight forward manner and are drafted 

not with an eye toward fending off litigation but toward educating 

consumers regarding their rights and obligations under the card. 

Turning to the subject of finance charges, two practices in particular contribute to the public’s impression that credit card companies design interest rates specifically to entangle the unsuspecting 

consumer. I’m talking first about the application of high penalty interest rates to previous credit card balances. For example, a consumer will make a series of purchases on a card with a 10 percent 

interest rate. Later, if the credit card company reprices his or her 

account, she may actually end up paying off that debt at a penalty 

rate of 30 percent. Many consumers think that imposing post hoc 

materially higher interest rates on prior balances is a misleading 

bait and switch. 

A second practice—known as trailing or residual interest—which 

the Chairman has discussed and fully described, is also of concern. 

In other words, this is the practice where, even if the consumer did 

exactly as the bill instructed—paid off the entire balance, let’s say, 

on March 20—she would still be responsible for the interest that 

accrued after she received her statement—that is, from March 1 

through March 20. The interest charges would be compounding 

while her check was in the mail. 

Better disclosure is one obvious answer here, perhaps even something as simple as a line on your bill that says, ‘‘In order to pay 

your balance in full, please remit the following sum by a certain 

date.’’ 

Regardless, something must be done. To be sure, credit card companies provide absolutely vital services for American consumers, 

employ over 100,000 Americans of all stripes, and are a sizeable 

component of the pension plans that many Americans rely on in retirement. But as one prominent industry insider recently remarked 

to me, ‘‘The industry has gone too far, pushed too far, and needs 

to clean up its act.’’ 

Fortunately, some of the work has begun. Several credit card 

companies have recognized the inadequacies of their disclosures 

and are eager to propose new formats. Moreover, the Federal Reserve plans to roll out new disclosure requirements later this year. 

I look forward to reviewing those regulations, and I urge the Fed 

to draft regulations that will provide some much-needed sunlight 

to credit card disclosures. 

Moreover, at my direction, my staff has reached out to credit 

card companies to find common sense solutions to these challenges. 

11

I’m happy to report that several issuers have assured us that they 

are reviewing certain policies and practices. I applaud Chase for its 

decision last month to eliminate the odious practice known as double-cycle billing. Also, just yesterday Chase announced a major 

overhaul of its over-the-limit fees, specifically that it will no longer 

charge such fees after 90 days. 

Similarly, Citi deserves praise for its announcement last week 

that, in its words, ‘‘A deal is a deal’’—as long as the cardholder upholds her end of the card’s terms, Citi will not reprice her card 

more than once every 2 years. 

These are all important steps. More must be done. Clearly, this 

hearing, I think, has played a major part in instigating change. 

And again I thank the Chairman for his vision and his leadership, and I look forward to creating a more consumer friendly lending environment in the figure. 

Thank you, Mr. Chairman. 

[The prepared statement of Senator Coleman follows:]

OPENING STATEMENT OF SENATOR COLEMAN 

Mr. Chairman, I’d like to start by thanking you not only for initiating this examination into certain credit card industry practices, but also—more broadly—for your 

continued and tireless advocacy on behalf of the American consumer. You have a 

long and distinguished history of looking out for the little guy, and this hearing is 

an important part of that laudable record. 

Credit card debt is often seen as a very personal problem, but the burgeoning 

level of household debt in America has implications for the entire nation. Over the 

past 25 years, U.S. household debt has ballooned from a collective $59 billion in 

1980 to approximately $830 billion in 2005. Even more staggering, the number of 

consumers filing for bankruptcy has increased by 609 percent. These figures have 

far-reaching implications. Too many Americans across all economic strata are saddled with high interest rate payments on consumer debt, impeding them from accumulating wealth and achieving their financial goals, including sending children to 

college and saving for retirement. This inquiry falls squarely in line with the Subcommittee’s long tradition of investigations designed to protect American consumers. 

During my tenure as Chairman, this Subcommittee conducted similar bipartisan, 

consumer-protection inquiries that uncovered unconscionable, often criminal, 

schemes in the refund anticipation loan and credit counseling industries. Those investigations exposed how many low-income Americans become mired in debt and 

pay usurious interest rates and exorbitant fees to unscrupulous lenders who exploit 

their lack of access to low-cost lending. Although the practices at issue today are 

not criminal schemes, they clearly have a devastating impact on the many families 

who are mired in debt—and credit opportunities that look like a helping hand actually become snares that sink the consumer into further depths of debt. High interest 

rates, hefty fees, and crippling penalties impede more and more hard-working families from pursuing their American dream. And this problem is only compounded by 

the often-intractable and jargoned disclosures of credit card terms, which are impenetrable to the average consumer. Too many families find themselves ensnared in a 

seemingly inescapable web of credit card debt, and not surprisingly feel that the 

credit card system is rigged against them. 

It is not lost on me that over the past 20 years, the credit card industry has created financial opportunities for countless Americans by extending credit to a far 

broader pool of borrowers than other lenders, including many high-risk borrowers 

who would not otherwise have obtained credit. But with these increased opportunities have also come greater complexity and greater vulnerability. Credit cards are 

no longer one-size-fits-all, and not every borrower knows, or is even told, which is 

the best, most affordable, card for their particular needs. Interest rates can increase 

in a moment’s notice, interest charges grow by leaps and bounds, and the credit 

card that once promised economic opportunity all too often portends financial ruin. 

In light of these fundamental market changes and the growing complexity of credit card terms, we need to do more and take a closer look at certain industry practices, including the adequacy of disclosure, the application of high, penalty interest 

rates to previous credit card balances, and the issue of trailing or residual interest. 

12

The disclosures contained in card agreements are written by and for lawyers with 

an eye more toward staving off litigation rather than educating consumers. Too 

often, consumers are caught unaware by important terms buried deep inside dense, 

fine-print contracts, replete with interminable sentences and complex jargon. For example, one credit card disclosure offers us the following:‘‘For each balance, the Balance Subject to Finance Charge on the statement is the average of the daily balances during the billing period. If you multiply this figure for each balance by the 

number of days in the billing period and by the applicable daily periodic rate, the 

result is the periodic finance charges assessed for that balance, except for minor 

variations caused by rounding.’’ 

After wading through that morass, it should come as no surprise to learn that the 

Government Accountability Office recently reported that disclosures are sometimes 

written at a‘‘twenty-seventh-grade level.’’ I can only assume that one would need—

after twelve years of grade school and four years of college—a 4-year medical degree, a 5-year PhD, and a 2-year MBA to fully grasp those particular provisions. 

Former Supreme Court Justice, Louis Brandeis, got it right when he 

said‘‘Sunlight is the best disinfectant.’’ My fear is that the average credit card’s complexity has vitiated the traditional disclosure’s effectiveness, and consumers are 

being left in the dark. In many ways, the Schumer Box has more accurately become 

the Schumer Pamphlet. We must all work to ensure that disclosures are made in 

a user-friendly, common-sense, straight-forward manner, and are drafted not with 

an eye toward fending off litigation, but toward educating customers regarding their 

rights and obligations under the card. 

Turning to the subject of finance charges, two practices in particular contribute 

to the public’s impression that credit card companies design interest rates specifically to entangle unsuspecting consumers. I’m talking first about the application of 

high, penalty interest rates to previous credit card balances. For example, a consumer will make a series of purchases on a card with a 10 percent interest rate. 

Later, if the credit card company‘‘re-prices’’ her account, she may end up paying off 

that debt at a‘‘penalty rate’’ of 30 percent. Many consumers think that imposing 

post hoc materially higher interest rates on prior balances is a misleading bait and 

switch. 

A second practice—known as‘‘trailing’’ or‘‘residual’’ interest—also illustrates how 

consumers can get caught in a seemingly never-ending cycle of debt. Consider a 

cardholder who spent $1,000 on holiday gifts in December and carried that $1,000 

balance through February. At the end of February, she would receive a bill for the 

$1,000 principal plus some interest charges, which would be due at some point in 

March, for instance March 20th. Even if she did exactly as the bill instructed—paying off the entire balance on March 20th—she would still be responsible for the interest that had accrued after she received her statement (that is, from March 1st 

through March 20th). The interest charges would be compounding while her check 

was in the mail. Better disclosure is one obvious answer here, perhaps even something as simple as a line on your bill that says:‘‘In order to pay your balance in full, 

please remit the following sum by March 20th.’’ 

Regardless, something must be done. To be sure, credit card companies provide 

absolutely vital services for American consumers, employ over one hundred thousand Americans of all stripes, and are sizeable components of the pension plans that 

many Americans rely on in retirement. But as one prominent industry insider recently remarked to me,‘‘The industry has gone too far, pushed too far, and needs 

to clean up its act.’’ 

Fortunately, some of this work has already begun. Several credit card companies 

have recognized the inadequacies of their disclosures and are eager to propose new 

formats. Moreover, the Federal Reserve plans to roll out new disclosure requirements later this year. I look forward to reviewing those regulations, and I urge the 

Fed to draft regulations that will provide some much needed sunlight to credit card 

disclosures. 

Moreover, at my direction, my staff has reached out to credit card companies to 

find common-sense solutions to these challenges. I am happy to report that several 

issuers have assured us that they are reviewing certain policies and practices. I applaud Chase for its decision last month to eliminate the odious practice known as 

double-cycle billing. Also, just yesterday Chase announced a major overhaul of its 

over-the-limit fees, specifically that it will no longer charge such fees after 90 days. 

Similarly, Citi deserves praise for its announcement last week that, in its 

words,‘‘A deal is a deal’’—as long as a cardholder upholds her end of a card’s terms, 

Citi will not‘‘re-price’’ her card more than once every two years. 

These are all important steps, and I look forward to working with our witnesses 

and with Chairman Levin to create a more consumer-friendly lending environment 

in the future.

13

Senator LEVIN. Thank you, Senator Coleman. Again thank you to 

you and your staff for the very effective role that you and they 

have played in this hearing. 

I would now like to welcome our first panel of witnesses for today’s hearing. Wesley Wannemacher, a consumer from Lima, Ohio; 

and Alys Cohen, a staff attorney with the National Consumer Law 

Center’s Washington office. 

Mr. Wannemacher is a husband and a father. In December he 

contacted the Subcommittee to tell his story of how high fees and 

penalty interest rates charged by his credit card company increased 

his $3,000 in wedding expenses into a $10,000 debt. 

I want to thank you, Mr. Wannemacher, for traveling here today. 

Ms. Cohen is here representing several consumer advocacy organizations as an expert in credit and lending issues. Ms. Cohen, I 

want to welcome you to today’s hearing. We look forward to hearing your perspective on the impact of credit card practices on consumers throughout the country. 

Pursuant to Rule 6, all witnesses who testify before this Subcommittee are required to be sworn, and at this time I would ask 

both of you to please stand and to raise your right hand. 

Do you swear that the testimony that you will give before this 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. WANNEMACHER. I do. 

Ms. COHEN. I do. 

Senator WARNER. Mr. Chairman, could I just make an unanimous consent request that I put an opening statement in to follow 

Senator Coleman? 

Senator LEVIN. Of course. 

OPENING STATEMENT OF SENATOR WARNER 

Senator WARNER. He talked about firms that had made corrective practices. In my State, we have the Capital One, and they 

never got involved in the question of double cycle billing, and they 

were among the very first to discontinue the universal default practice. 

I thank the Senator. I would like to expand those remarks for 

the record. 

[The prepared statement of Senator Warner follows:]

OPENING STATEMENT OF SENATOR WARNER 

Thank you Mr. Chairman for holding this hearing on credit card practices. 

There are many concerns that people have raised about the credit card industry 

and its practices, and I think it is important that these concerns are given due consideration. We need to be sure consumers are protected. However, as we discuss 

these concerns, we should not forget about the many benefits that the credit card 

industry provides consumers, businesses, and our economy. Our financial system is 

the best in the world, and the financial institutions before us today have played a 

role in the growth of our economy. It is also worth noting that there is tremendous 

competition in the credit card industry, which can lead to more complex products 

as credit card companies adjust to remain competitive in the marketplace. 

As we discuss the development of various practices in the industry, we must remember the convenience and flexibility credit cards offer consumers to purchase 

goods and services while allowing them to manage those purchases through monthly 

payments. You may recall that in the 1980’s all credit cards looked very similar. 

Nearly all had an interest rate of around 20 percent and an annual fee of $30-$50. 

Most importantly, only about one-third of Americans could qualify for a credit card. 

14

1The prepared statement of Mr. Wannemacher appears in the Appendix on page 62. 

Today, interest rates are lower and many cards are available without an annual fee, 

saving consumers hundreds of millions of dollars. According to a 2005 GAO report, 

the average interest rate for credit card purchases was 12.3 percent. And now, the 

benefits of credit cards are available to a much larger segment of America. Once 

only offered to a select few, now approximately 75 percent of Americans have a credit card. 

With these advancements, however, we must not lose sight of the fact that the 

increased complexity of credit cards can have negative effects on consumers. Unfortunately, as these products and technology have changed, many of the disclosures 

have not. As with the case of Wesley Wannemacher who we will hear from today, 

cardholders can find themselves in financial distress if they do not understand the 

consequences that late payments may have on increasing their interest rates or fees. 

I understand the Federal Reserve is in the process of re-writing the required disclosures for credit cards and that the industry is supportive of this effort. I hope that 

the Federal Reserve can act expeditiously to make the necessary changes. 

While there are members of the credit card industry that may use questionable 

practices, I think it is important to recognize that not all companies are the same. 

Capital One based in McLean, Virginia, indicates that it has never engaged in a 

practice known as ‘‘double-cycle billing’’ and some time ago abandoned ‘‘universal 

default.’’ I am happy to learn that recently other credit card companies have 

changed their practices to provide more clarity for their credit card products. The 

Federal Reserve and the credit card industry must continue to work together to better serve consumers. 

In closing Mr. Chairman, thank you for raising these important issues to our attention.

Senator LEVIN. We would be happy, of course, to receive that and 

any other opening statements. We are sorry that time does not 

allow them now. This is, I guess, the tradition here for everyone 

to have an opening statement. But perhaps people can weave those 

into their time when they are recognized. 

Mr. Wannemacher, we will have you go first, and you may proceed. 

TESTIMONY OF WESLEY WANNEMACHER,1 CONSUMER, LIMA, 

OHIO 

Mr. WANNEMACHER. Mr. Chairman, and Members of the Subcommittee, thank you for having me here today. 

Senator LEVIN. If you could try to limit your remarks, both of 

you, to 5 minutes, we will put your entire statements in the record. 

Mr. WANNEMACHER. First of all, I would like to thank everyone, 

especially my wife and family, who have been so supportive the 

last few years. And I would also like to reach out to the millions 

of people who have gone through or are currently going through 

situations similar to my own. 

My name is Wes Wannemacher. I am married and raising a 

small family. I wish I could come here and tell you that I have paid 

all my bills on time, but my goal is not to convince you that I am 

the most responsible adult in the United States. 

Toward the end of 2001, my wedding was approaching. As a 

young adult, I really had no idea just how much a wedding would 

cost. I had applied for and received a credit card from Chase with 

a $3,000 limit. This was quickly reached after paying for flowers 

and a photographer. I charged a total of $3,200 on this card and 

never charged anything beyond that. I have been trying ever since 

to pay it off. 

I could tell I was going to have problems paying these and other 

debts. Debt seems to invoke a feeling of hopelessness, unlike any 

15

other problem I’ve encountered. When a creditor calls you on the 

phone and you make a minimum payment, you know that you have 

made no real progress and that in one more month they will call 

again. 

From 2000 to 2004, I learned what many adults already know. 

As your pay increases, your expenses increase as well. During 

those 2 years I tried to make payments to Chase. I had not asked 

for a payment plan or any method to resolve the balance, but I 

made whatever minimum payment they would take when they 

called on the telephone. These payments were usually close to 

$200. With limited funds, you have to prioritize, and since Chase 

could not turn off my lights or kick us out of our home, there would 

be times that their payment would be the lowest priority. 

In the last half of 2004, my wife left her job because of complications with her pregnancy and my father asked me to move home 

and help out with the family business. 

As 2005 started, we had another baby and we had moved back 

to our hometown. I realized that my problems with Chase would 

only get worse unless I took action. Early in 2005, I called Chase 

and asked if they would take $3,000 to settle the debt which, by 

this point, was $4,600. I offered $3,000 because it was my original 

credit limit and I had never gone much past that. Unfortunately, Chase was unwilling to settle for $3,000. I should 

not speculate why they declined my offer, but I would guess that 

the person on the other end of the phone had a goal to get as much 

money as possible. 

This meant I was back to making payments and watching the balance rise. In 2006, my balance had exceeded $5,300 and I knew 

that I needed to make them work with me before I ended up in 

bankruptcy. I called and asked if there was something they could 

do to help me. Eventually, I was offered a payment plan. The 

premise of the plan was to pay off the $2,300 that was past the 

credit limit. However, the representative was very clear that once 

I got the balance down to $3,000 I would be taken off this plan and 

the interest rate would go back to normal. 

While I was making regular payments of between $140 and $210 

a month, my stepdaughter was enrolled in therapies that were not 

covered by our new insurance plan and she had her tonsils removed. Before I knew it, I had a very large medical debt as well. 

With these offices calling and asking for payment, we were quickly 

overwhelmed. In December 2006, I gathered up all the statements 

from the various companies I owed money to and took them to a 

credit counselor. 

My credit counselor sent proposals to everyone. Chase was the 

only creditor who declined her offer. Despite filling out a power of 

attorney, Chase made many attempts to contact me directly. I 

would instruct representatives who called me on the phone that 

they needed to contact my credit counselor. Many times they would 

say things to try to pressure me into making more payments directly. 

Around this time I saw a news article mentioning Senator Levin 

and his desire to look into cases like mine. The article mentioned 

that people who feel they have paid excessive fees and charges 

should contact his office, so I did. 

16

1The prepared statement of Ms. Cohen appears with an attachment in the Appendix on page 

64. 

Over the last few months, Chase representatives have tried to 

convince me to not enroll in debt management and asked for direct 

payments. Finally, in February 2007, my credit counselor offered 

Chase a payment plan of $130 a month for 47 more months, totaling $6,110. Chase accepted. At the same time I was working with 

Senator Levin’s office which, after reviewing all of my account information, asked if I would testify here today. 

I was asked on a Thursday to testify today. On the following 

Monday a representative of Chase called me on the telephone to let 

me know that they had reviewed my account and decided they are 

forgiving my balance. I asked the representative if my plan to testify today had anything to do with their change of heart. The representative assured me that their decision was based solely on a 

review of my account. 

I agreed to come testify because my primary concern is for the 

future of my own children. I am only here to let people know what 

happened to me. From September 2001 to February 2007 I have 

paid Chase over $6,300. If they had not reviewed my account, I 

would have paid another $6,110 on a $3,200 debt. 

Thanks for listening. 

Senator LEVIN. Thank you, Mr. Wannemacher. Ms. Cohen. 

TESTIMONY OF ALYS COHEN,1 STAFF ATTORNEY, NATIONAL 

CONSUMER LAW CENTER 

Ms. COHEN. Mr. Chairman, Ranking Member Coleman—— 

Senator LEVIN. He will be back. There is a joint session of Congress that we have at the moment, so he has a conflict, as a number of us do. But he will be back. 

Ms. COHEN. Mr. Chairman, Ranking Member Coleman, and 

Members of the Subcommittee, thank you very much for inviting 

me. 

I am testifying today on behalf of the low-income clients of the 

National Consumer Law Center, as well as Consumer Action, 

Demos, National Association of Consumer Advocates, and U.S. 

Public Interest Research Group. 

We also thank Chairman Levin and Ranking Member Coleman 

for commissioning a landmark GAO report on credit cards. 

We have a debt crisis in America and its source is the practices 

of the credit card industry. Credit card debt has caused consumers 

to file bankruptcy more often, reduce savings to a historical low 

point, and spend the equity in their homes to pay off credit card 

debt. 

Credit cards are a tremendous convenience for consumers who 

are well off and can pay their balances every month. However revolvers, who do not have the means to pay off a credit card balance 

every month, make up 80 percent of issuer revenues. Revolvers are 

socked with penalty rates averaging 27 percent APR and fees averaging over $30. These fees stack up, making it difficult for borrowers to pay off their balances. 

This squeeze on borrowers has been called the sweat box by Professor Ronald Mann. Such back-end pricing protects issuers from 

17

losses, but it does not protect borrowers’ assets. Credit cards are 

issued without any real determination of the borrower’s ability to 

repay and these fees only push the most vulnerable among us further into mountains of debt. In addition, high interest rates paid 

by everyone allow the convenience users to subsidize the revolvers 

to the extent the fees do not already take care of that. 

It is essential to note that credit card debt primarily is incurred 

for basic expenses—medical bills, auto repairs, utilities, and groceries. They are a safety net for many Americans. 

Demos and the Access Project report that 29 percent of revolvers 

have charged medical debt. According to the National Council of La 

Raza, almost 39 percent of Latinos reported basic living expenses 

as contributing to credit card debt. 

Credit card companies were not always so free to engage in abusive behavior. Deregulation began in 1978 with the Supreme 

Court’s decision in the Marquette case that gave national banks the 

green light to bring the pricing rules from their home States across 

State lines. In 1996, the Supreme Court’s Smiley case uncapped 

the amount of fees that credit card banks can charge as long as 

their home States allow it. 

The OCC’s preemption of State laws that specifically regulate 

credit cards has further weakened consumer protections. Because 

agency funds for all the bank regulators come from the regulated 

banks, there is a race to the bottom so that agencies can court 

banks to choose them. States are left on the sidelines and Federal 

law primarily is limited to disclosure rules, which are inadequate. 

Here are some real-world examples of credit card abuses. A service member opened a credit card account with First Premier Bank 

last November. The credit card had a $250 credit limit and the 

bank charged $178 in fees. As of January 25, she owed a balance 

of $379.45 for almost $85 worth of purchases. Another client bought a baby crib for $158 just after coming out of bankruptcy and charged it to a Capital One card with a $200 

limit. He has paid over $700 and is being sued for over $3,500 for 

just this one purchase. 

Allocation of payments also is a problem. A client who was assessed a balance transfer fee of $250 was charged 18.9 percent on 

that purchase so that this balance continued to increase while payments were applied to pay off the lower rate portion of his account 

transferred from elsewhere. 

Another classic example, very similar to Mr. Wannemacher’s, is 

Josephine McCarthy’s, where on one account she had over $5,300 

in a balance on only $218 in purchases. On another card she owed 

over $2,600 for $203 in purchases. 

Other practices about which I can provide more information include penalty rates and universal default, including where rates increase based only on credit score changes, unilateral changes in 

terms, and mandatory arbitration clauses. 

We call on policymakers to take a stand against industry abuses. 

We need a fair and functioning market. People have the right to 

expect that. 

We look forward to working with Chairman Levin, Ranking 

Member Coleman, and other Members of this Subcommittee on further examination of the credit card industry. 

18

I look forward to your questions. 

Senator LEVIN. Thank you very much, Ms. Cohen. 

Mr. Wannemacher, you have accepted personal responsibility for 

getting into debt. You did that again today. You have been consistent in acknowledging that. You tried to pay the debt instead of 

going into bankruptcy, and over the next 6 years after you incurred 

that debt you made payments that roughly averaged about $1,000 

per year. 

Were you surprised that those payments you made never seemed 

to lower how much you owed on the card? 

Mr. WANNEMACHER. Yes. At first I was very surprised and then 

sort of became immune to the effect probably 3 or 4 years in. 

There’s a basic assumption that I had that there is protection 

against people treating you unfairly. It just really seemed like 

there was no end in sight. 

I am glad we are here today to discuss it, but I think more needs 

to be done because I think there are plenty of people that have an 

example similar to mine, or worse. 

Senator LEVIN. The records that you have given us show that, in 

2005, your interest rate reached 30 percent. What is it like, once 

you are in debt, to try to pay that debt off when the interest on 

it is 30 percent annually? 

Mr. WANNEMACHER. Making payments on a debt, it feels like 

every month you take one step forward but two steps back. You 

watch that 30 percent and the other fees just continue to grow your 

balance. It is a feeling similar to riding in a submarine when the 

water pressure is really high. Every time the phone would ring it 

gets hard to breathe and you are not sure whether you should even 

answer it or not. 

Senator LEVIN. You have been charged $1,500 in over-limit fees. 

The records show that you went over your limit by $200. So on a 

$200 overage, you have been charged over seven times that amount 

in penalties. You never made another purchase after the beginning 

of 2002 but you were charged an over-limit fee almost every month 

for the next 4 years. And 47 times, again, you were charged with 

that fee. 

In some months, such as July 2002, it was the over-limit fee that 

kept your account over the $3,000 limit, so that you would then be 

charged another over-limit fee. 

Did you realize going in, when you took this credit card, and 

made a deal with them, that for going over the credit limit by $200 

that you would be charged over-limit fees repeatedly, 47 times? 

Mr. WANNEMACHER. No. To me I would view going over-the-limit 

as a singular event. Like you have described, doing it three times 

or having the fees or interest pushing my account over-the-limit 

were all things that I was unaware could happen. 

And then once they did, I guess I was not surprised, because 

there really does not seem to be anywhere to go to complain. Chase 

is a large corporation and navigating through phone systems or 

trying to get a representative on the other end of the line who 

would be sympathetic to your situation when you owe them, or 

when the balance indicates an amount similar to what I had, is 

often difficult. 

19

Senator LEVIN. On the fees that you were charged, both overlimit fees and late fees, they were added to your outstanding balance and then interest was charged on those fees. Were you aware 

of the fact that the fees that you were charged, the penalty fees, 

would increase your interest charges? 

Mr. WANNEMACHER. No, I was not aware. It was surprising at 

first but, as I mentioned earlier, you become immune to it and you 

know that—there is times where it seems like no matter how much 

you pay, they have got you and you are going to continue to pay 

until they are happy somehow. 

Senator LEVIN. To avoid a late fee you had to pay, like other 

credit card holders, a specified minimum on the bill. Some months 

that minimum was extremely high. For instance, in March 2005, 

the bill stated that you owed about $4,400 and you had to make 

a minimum payment of $1,600, a little more than a third of the 

bill. Did that high of a minimum mean that you were virtually always going to have a late fee? 

Mr. WANNEMACHER. At the time I did not realize—to me, paying 

late would have meant the money came in afterwards, not that 

there was two conditions, that I not only had to pay on time but, 

as well, I had to pay the amount that they were asking for. So I 

was unaware that while I was paying or making payments over the 

phone that I would be assessed a late fee. 

Senator LEVIN. Can you describe how your inability to pay off 

this growing credit card debt affected your business or your family? 

Mr. WANNEMACHER. It affected probably my family more than 

anybody else. I have four children total, but they have to share two 

bedrooms between the four of them. We were homeowners in 2002 

and 2004, but have been unable to get preapproved for a home loan 

while I have this debt. It is difficult. There are things, I know my 

oldest son needs braces, which an orthodontist would take a payment plan probably very close to what I am paying Chase or what 

I had been paying Chase. 

So there are all kinds of more productive or positive ways I feel 

it could have been spending that money. 

Senator LEVIN. You say Chase called and said that the debt was 

being dropped. That call was made to you within the last 2 weeks 

wasn’t it? What did they tell you when you asked why it was 

dropped? 

Mr. WANNEMACHER. I asked the representative if my agreeing to 

come here and testify today had anything to do with it, mostly out 

of curiosity. She assured me that was not the fact, that she had reviewed my account and that my offer of $3,000, when it was made, 

should have been taken. They had counter offered $3,500 which at 

the time I could not afford. Since I was unable to resolve the issue 

at that time, the balance stayed the same. I think I made a $300 

or $400 payment at that time and then continued to make the minimum payments. 

But she indicated that after reviewing my account, at that time 

they should have taken the $3,000 that I offered. And since they 

had not, that the payments and everything that I had made since 

that point would cover the balance. 

Senator LEVIN. Do you think it is a coincidence? 

20

Mr. WANNEMACHER. I cannot really speculate on what is going 

on inside the walls at Chase, but it is a very suspicious coincidence, 

in my mind. 

Senator LEVIN. Ms. Cohen, is Mr. Wannemacher’s experience an 

unusual example? Or has the National Consumer Law Center seen 

many other examples of this type of problem? 

Ms. COHEN. Senator, we regularly see borrowers who have too 

much debt that they cannot afford. Credit cards are no different. 

And often, the fees and the penalties do outweigh the initial 

charges that were made. 

Senator LEVIN. Is it reasonable to think that a consumer with financial difficulties could ever pay off a debt that grows at a 30 percent rate? 

Ms. COHEN. I think it is very challenging, as you have heard 

from Mr. Wannemacher. His credit card debt is not his only debt. 

Let me give you one brief example. 

If you have only one card at 18 percent APR and your debt is 

$4,500, and you make a minimum payment of 2 percent, it will 

take you 532 months to repay that debt and you will pay $12,431 

in interest. 

Senator LEVIN. Ms. Cohen, in your printed testimony, you refer 

to a case called Discover v. Owens. 

Ms. COHEN. Yes. 

Senator LEVIN. In that case a woman named Ruth Owens 

charged about $2,000 on her credit card that had a $1,900 limit. 

So she went $100 over the limit. Her credit card company began 

to charge her interest, over-limit fees, and late fees. And for 6 

years, from 1997 until 2003, she got one cash advance for $300 but 

otherwise did not use the card. 

So it is very similar to this case. By 2003, after 6 years of payments, she had paid a total of about $3,500 on her $2,000 debt but 

she still owed $5,600 on her $2,000 debt. 

So, for her $2,000 debt, the credit card company charged her 

$6,000 in interest, $1,500 in over-limit fees, and $1,200 in late fees. 

The credit card company took her to court in Ohio to collect what 

they claimed she still owed. 

The court said they were not going to find for the plaintiff, they 

were going to find for her. Here is what they said: ‘‘The Court finds 

that the repeated 6-year accumulation of over-limit fees to be manifestly unconscionable. The determination of unconscionability is to 

be made in light of a variety of factors, including the sheer harshness of the contractual terms together with unequal bargaining position which renders certain consumer contracts suspect and worthy of judicial revision.’’ 

The Court later said that, ‘‘The defendant, the credit card holder, 

has clearly been the victim of plaintiff’s unreasonable, unconscionable, and unjust business practice.’’ 

The Court found, in other words, that over-limit fees of the type 

which are repeatedly imposed is unconscionable. But that practice 

has not ended, has it? Ms. Cohen, do you know? 

Ms. COHEN. As I understand it, the practices continue, which is 

why we heard the recent announcement about the change in those 

practices from one issuer. 

21

Senator LEVIN. One issuer has just announced within the last 

couple days? 

Ms. COHEN. It was my understanding that Chase announced 

they were at least changing their practice with regard to over-limit 

fees, but no, the practice has not changed. 

Senator LEVIN. My time is long gone. 

The rules that apply, that are given to the credit card applicant, 

are incredibly complicated; are they not? Could you just give us a 

very brief description of just how murky, complicated, incomprehensible these rules are? 

Ms. COHEN. I think we heard before that some of them are written at the 27th-grade level. Readability experts say that things 

need to be written at the eighth-grade level in order to be universally understandable. And so we have got a long way to go. 

The other thing is that even if you understand your disclosures, 

the terms can be completely unfair and you have no way to change 

that with your credit card issuer. 

Senator LEVIN. What is the 27th-grade level? What does that 

mean? 

Ms. COHEN. It was all those graduate degrees we heard about 

from Senator Coleman. 

Senator LEVIN. Thank you. Senator McCaskill. 

Senator MCCASKILL. Thank you, Senator Levin. 

Mr. Wannemacher, I think that the moral of your story is that 

for everyone out in America what you need to do if you are having 

a tough time is to call Senator Levin’s office. It is like winning the 

lottery to call Senator Levin. That is what is called good constituent service, Senator. 

Senator LEVIN. And he is not even my constituent. 

Senator MCCASKILL. I do not know that I can get up to that 

standard. 

A couple of things. First, Mr. Wannemacher, I want to ask you 

while you were struggling with all this, I am willing to bet a dollar 

to donuts that you were solicited for additional cards. 

Mr. WANNEMACHER. I still receive at least one a week or more 

solicitations. But at the same time that I cut up the Chase card, 

my wife and I decided that we would not finance anything unless 

it were a house, education, or car and we have tried to stick to that 

rule as best we could since 2002. 

Senator MCCASKILL. Were there times when you were struggling 

to pay all of these bills and the same companies that were calling 

you on the phone to pay the bills were sending you solicitations in 

the mail to take another card? 

Mr. WANNEMACHER. Yes. I have struggled to pay all of my bills 

for quite a while now, but to me, I would see myself as a high risk. 

But at the same time, high risk also means high profit potential, 

high interest rates. So I cannot blame them but I do have the 

choice not to apply for any more cards and I choose not to. 

Senator MCCASKILL. I have to be careful here today because I 

have incredible love and respect for my mother but I have lived 

through with my mother a lot of the things that you have talked 

about this morning. My dad had a debilitating brain injury and my 

mother had never worked outside of the house. And so all of us 

22

tried to rally around and help her. She is a very strong, independent woman. 

The way that she thought she could see her way through this 

was to use credit cards. 

Fast forward several years and my mother was in what I would 

term a debilitating depression about her inability to manage her 

personal finances because what had happened to her is very similar to what had happened to you, being solicited for credit cards. 

Now keep in mind the entire time that they were sending her 

these credit cards, her credit rating had to have been not good because she was really struggling to make ends meet. 

Once my sisters and I figured out how bad it was, we gathered 

everything together and took over, with her kicking and screaming 

the whole way about how she can do on her own, she can do it on 

her own. If you met her, you would understand what I was saying. 

She literally was kicking and screaming all the way. 

We began trying to manage it. 

The interesting thing is even after we began to try to manage it, 

it never ended. Just recently I had been paying on some of her bills 

for some time and, I will confess, had not been looking at the bills 

closely. And this was a card that I had torn up and written them 

this card will no longer be used. And I realized there was a recurring charge on it. 

I figured out what happened. They had sent her one of those 

checks in the mail, cash this check, this is your money. And she 

had not read the fine print. 

I am curious, Ms. Cohen, have you all seen very much of that, 

where you get one of these checks in the mail and somebody who 

is struggling financially and maybe not paying as close attention as 

they should, cashes one of these checks. And then they have a recurring charge on their credit card month after month after month. 

And getting it off there is not an easy task. It is a little bit like 

the man you talked about in your testimony that got the Diners 

Club membership, even though he said he did not want it. And 

they kept charging him for the Diners Club membership. 

Can you speak a little bit about these checks that they send you 

in the mail that obligate you to something ongoing, even though it 

looks like they are giving you money? 

Ms. COHEN. My understanding is that in some contexts those 

checks are called live checks. And you get them and you cash them 

and you have obligations associated with them. 

It is also my understanding that credit card issuers, mortgage 

companies, and other lenders use them to get their foot in the door 

and they are the first step to increasing your debt through other 

kinds of loans through the company. 

Senator MCCASKILL. As far as you know, at the Consumer Law 

Center, has there ever been any legal action concerning these 

checks that are sent as if they are giving you money, which are 

really you signing up for debt? 

Ms. COHEN. I do not have any information about that but I 

would be happy to get back to you. 

Senator MCCASKILL. I think it is just unconscionable that they 

are sending these checks to people that they know that are financially stressed. It is like sending a six pack of beer to somebody 

23

who is on their 30th day of sobriety and saying why don’t you just 

have another drink? 

I am looking forward to the testimony of the next panel. 

On solicitation—and clearly, the irony of all of this is that I have 

done a lot of Internet shopping the last several years of my life because I have been campaigning and do not have time to go into a 

store. So I have spent more money than I would like to admit on 

my credit cards over the last couple of years and I pay the bill as 

quickly as I can figure what it is. 

I have learned with one card company I need to go online and 

pay it because by the time I get the bill in the mail sometimes I 

do not have enough time left to pay without getting the penalty, 

even though I always pay in full. So I have learned to go on the 

Internet and find the bill before I get it in the mail just to make 

sure they do not get that money out of me. 

That is a side issue but the irony is you would think I would be 

the customer they are soliciting. To this day I get very few solicitations for credit cards because I pay my bills every month. I bet my 

mother still gets two or three a week. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator McCaskill, very much. Senator Warner. 

Senator WARNER. Mr. Chairman, I think this is a very important 

hearing and I will join you and follow it in the subsequent sessions 

we have. 

I guess this is what puzzles me a bit. I started my inauspicious 

career as a young lawyer in a firm and dealt with banks. I had 

quite a few experiences with a number of old-time bankers and so 

forth and got an insight into the loaning of money. Then oftentimes, not too often fortunately, I would have to go to the collection 

process for defaulted loans and so forth. 

But I look at this whole credit system and drawing on that background, and it puzzles me why institutions, financial institutions, 

which have such a remarkable history of serving America, have 

gotten into this business and their names attached to it, and they 

either intentionally or otherwise set traps to snare these basically 

younger people and others who come in and struggle to pay off 

these situations. 

I just find it so distasteful. I just wonder why they want to be 

involved in it. Can you touch on what the psychology is, Ms. 

Cohen? 

Ms. COHEN. Thank you for your question, Senator. 

Senator WARNER. The GAO, in its report, alludes to this. I presume you have seen that GAO report? 

Ms. COHEN. I have seen the GAO report. 

I cannot answer the psychology question but I can answer it from 

a business model perspective. I really think Mr. Wannemacher said 

it best when he said high risk is high profit potential. 

If 80 percent of the profits, of the revenues, are coming from people like Mr. Wannemacher who cannot pay their bills, then the system is built like a house of cards where profit is made on one side 

and the borrower welfare on the other side is irrelevant to how 

much profit is made. They can squeeze and squeeze people. 

24

1See Exhibit 3a. which appears in the Appendix on page 136. 

So as long as the system is set up where that is permitted, there 

is no reason to not follow the incentives in that direction. 

Senator WARNER. Well, I will pose the same question to the panels that follow hereafter. But there has got to be a human quotient 

in this thing. I would not want to be involved with any financial 

institution if that is the job they gave me. I would tell them to go 

packing, find somebody else. I could not do with it. 

So we will have to look into that because I do believe these hearings, together with—as I understand—our colleagues in the Banking Committee, Congress is going to police this thing pretty severely and clean it up. So perhaps we can get some good help and 

guidance from the industry, because these institutions, major financial institutions, have a long history in corporate recognition. I 

just do not think they want to have this sort of thing persist. 

Thank both of you for coming up here today. 

Senator LEVIN. Thank you, Senator Warner, for your very accurate, thoughtful, heartfelt comments. 

Just a couple more brief questions. 

The billing statement that is used by the Bank of America explaining how these interest rates are reached is, I think, impossible 

for the average person to understand. I am tempted to read it. 

Maybe I will. It will take 30 seconds.1

‘‘Average Daily Balance Method (including new transactions): We 

calculate separate balances subject to finance charge for Category 

C balances and Category D balances. We do this by calculating a 

daily balance for each day in the billing cycle, adding all of the 

daily balances together, and dividing the sum of the daily balances 

by the number of days in the billing cycle. To calculate the daily 

balance for each day in this statement’s billing cycle, we take the 

beginning balance, add an amount equal to the applicable daily 

periodic rate multiplied by the previous day’s daily balance, add 

new transactions, new account fees, and new transaction fees, and 

subtract applicable payments and credits. If any daily balance is 

less than zero, we treat it as zero.’’ 

That is the only clear thing so far. 

‘‘If the previous balance shown on this statement was paid in full 

in this statement’s billing cycle, then on the day after that payment 

in full date we exclude from the beginning balance new transactions, new account fees, and new transaction fees which posted 

on or before the payment in full date, and we do not add new 

transactions, new account fees, or new transaction fees which post 

after that payment in full date.’’ 

Now do you think the average consumer can understand that, 

Ms. Cohen? 

Ms. COHEN. Everyone laughed while you were reading it, which 

I think is a pretty good answer to that question. 

Senator LEVIN. I understand that the credit card issuers have 

said that they would like to simplify and clarify the disclosure language, and apparently they support an ongoing Federal Reserve effort to revise the key credit card disclosure regulation known as 

Regulation Z, and to develop model disclosure language that everybody could use. 

25

If the Federal Reserve did improve credit card disclosures in your 

judgment, Ms. Cohen, would that be enough to cure the worst of 

the problems that we are discussing today? Or is there still a need 

to do more than just better disclosure? 

Ms. COHEN. I do think that disclosure is a piece of the picture. 

The National Consumer Law Center submitted 80 pages of single 

spaced comments to the Federal Reserve on that. So it is true that 

improving the disclosures will help. 

But the real question here is where is the burden? I have been 

here in Washington for almost 10 years and all I hear over and 

over again is let’s improve disclosures. What that means is the entire burden is on the borrower to take apart the description you 

just gave, understand it for themselves, and make a choice in an 

unfair market. 

So what we really need is better disclosure so people can shop, 

if they shop, and then protections so that unfair practices, abuses, 

destructive lending can be stopped. 

If there were poisonous food or medication put on the shelves, no 

one would say read this and learn that it is poison and learn not 

to buy it. They would be taken off the shelves. We want the same 

thing for credit. 

Senator LEVIN. Who needs to adopt those protections, in your 

judgment? 

Ms. COHEN. The Federal Reserve Board has the authority to improve the disclosures. They are not in a position to change everything that we need. And so we look to Congress to pass strong legislation. 

Senator LEVIN. Thank you. Senator McCaskill. 

Senator MCCASKILL. Do you believe it would be practical, in fact 

this would be a good question to ask the next panel. I do not know 

this, but I have a feeling they may say that these disclosures are 

so complicated because their lawyers tell them that is what they 

have to say. And I bet the lawyers that helped them write those 

added significantly to their costs that fiscal year too, looking at the 

disclosures. 

But do you think that it would be possible for Congress to, in any 

way, urge the Federal Reserve Board to go more quickly or to do 

this in more plain language? It does not seem that complicated to 

me. It seems that you say this is the interest rate we are going to 

charge you. If you do not pay at all by the date that it is due, you 

are going to have an interest rate. If you go over your credit limit, 

this is what you are going to pay. And by the way, you have to pay 

it every single month, maybe forever. 

Ms. COHEN. Some of the points that you just made are not currently in a clear manner in the disclosure. How long it is going to 

take you to pay off your bill is not in your disclosure and it is something that we have recommended that the Federal Reserve Board 

can do. I know they have a process to make sure that all of their 

I’s are dotted and their T’s are crossed. But we are hoping at the 

end of it that a lot of the things you just described will be in. There 

are also bills that have been introduced in Congress that do similar 

things for disclosures. 

26

I also want to respond to your comment earlier about live checks. 

Representative LaFalce proposed a bill to ban live checks earlier in 

the 2000s but no action was taken in either house on that bill 

Senator MCCASKILL. I will have to find out if maybe we can get 

that started again. 

The other question I had about the amount of interest, it seems 

to me the fees for the low income people where they are making 

a lot of money, the penalty fees, the going over-the-limit fees, the 

various fees and penalties, are getting into some serious money 

now as opposed to the interest rate for the low income people. 

Has there been any effort made by your organization or others 

that I could look at that compare someone who is low income with 

what actually happens to them on say a $500 limit credit card 

versus a $500 payday loan? I mean, are these not very similar in 

terms of when we get to the bottom line as to how much is being 

charged? Are we not getting to 30 percent, something that a long 

time ago in law school that we would have called usurious? 

Ms. COHEN. We do not hear that word very often in Washington 

anymore. 

I imagine that we have done some analysis and I am happy to 

get back to you with the details. What I have seen with payday 

lending and credit cards is that the problem is similar. Someone 

borrows a small amount of money because they cannot pay a basic 

bill, and then they are stuck week after week, month after month, 

paying back small amounts and never really covering the total 

amount. 

Senator MCCASKILL. Never getting to the principal. 

Ms. COHEN. Correct. 

Senator MCCASKILL. They never get to the principal. 

And watching my mom, she has never even met the principal, 

God love her. She has always just been paying interest, always 

making minimum payments until we kind of took over. I look at 

the amount of money she has paid over the years and it is just 

mind-boggling how expensive this has been. 

Having done some work on payday loans at the State level, I 

think it is time we begin talking about really what the real amount 

of money that these people are being charged and comparing them 

to the payday loan industry. 

And that may be, Senator, maybe these institutions would feel 

a little more comfortable about what they are doing. Because I do 

not think that these are the kinds of names in banking that I do 

not think see themselves as a payday loan lender. But it appears 

that, in many aspects, they are. 

Ms. COHEN. It is our view that the fees that are charged should 

be reasonably related to the cost incurred by the credit card issuer. 

And right now we do not see anything like that. 

Senator MCCASKILL. There is no connection between what it is 

costing them to service it and the amount of fees they are charging. 

Ms. COHEN. It is generally a flat fee. They might be able to explain better how that fee is derived. 

Senator MCCASKILL. Thank you. 

Senator LEVIN. Senator Warner. 

Senator WARNER. No, Mr. Chairman, I think we should proceed 

to the next panel. 

27

Mr. Chairman, I think for those following this hearing, we should 

advise that many of our colleagues are engaged in a very important 

joint session of Congress this morning and could not arrange to be 

here. But I commend the Chairman and the Ranking Member for 

going ahead. I decided this was a more important challenge for us 

here this morning in the Senate. 

Senator LEVIN. Thank you, Senator Warner. 

Ms. Cohen, you have made a number of recommendations on behalf of a number of organizations. These are going to be referred 

to the Banking Committee along with our work. The Banking Committee has the legislative jurisdiction. We are working very closely 

with them. They know of our hearings. I have talked to Senator 

Dodd, I know Senator Shelby. They have had hearings on this subject. We are trying to address different aspects of the same problem 

so we do not duplicate. 

But this very valuable testimony of both of yours will be part of 

a recommendation and probably a bill which we will introduce, 

which would then be referred to the Banking Committee, as Senator Warner has mentioned, because they have the legislative jurisdiction. 

We have oversight jurisdiction here, investigative jurisdiction, 

and we are going to make full use of your testimony as well as the 

testimony of the next panel. 

So we thank you both for coming, and you are excused. We will 

now call the second panel. 

Let me now welcome our second panel of witnesses for today’s 

hearing. Bruce Hammonds, President of Card Services at Bank of 

America; Richard Srednicki, Chief Executive Officer of Chase Bank 

USA; and finally Mr. Vikram Atal, Chairman and Chief Executive 

Officer of Citi Cards. 

I welcome you all to this hearing. I look forward to hearing your 

testimony on your banks’ practices relating to fees, interest rates 

and grace periods, and anything else you might want to testify 

about relative to this subject. 

We know that for some of you it has been a challenge to get here. 

We appreciate that. And again, we also appreciate the cooperation 

that your banks have shown to the Subcommittee. 

Pursuant to Rule 6, all witnesses who testify before the Subcommittee are required to be sworn. So at this time I would ask 

each of you to please stand and raise your right hand. 

Do you swear that the testimony that you give before this Subcommittee today will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. HAMMONDS. I do. 

Mr. SREDNICKI. I do. 

Mr. ATAL. I do. 

Senator LEVIN. We will be using the timing system today. Again, 

we would ask that you would limit your testimony to no more then 

5 minutes. 

We will go in alphabetical order, I guess by bank name. I am trying to interpret this. I was going to say we go in alphabetical order 

so Mr. Hammonds goes first, but apparently it is bank name. 

28

1The prepared statement of Mr. Hammonds with attachments appears in the Appendix on 

page 81. 

So the Bank of America, Mr. Hammonds, we will have you go 

first, followed by Chase which is represented by Mr. Srednicki, and 

follow up with Citigroup that is represented by Mr. Atal. 

After we have heard all of your testimony, we will then turn to 

questions. 

Mr. Hammonds, please proceed. 

TESTIMONY OF BRUCE L. HAMMONDS,1 PRESIDENT, BANK OF 

AMERICA CARD SERVICES, BANK OF AMERICA CORPORATION, WILMINGTON, DELAWARE 

Mr. HAMMONDS. Good morning, Chairman Levin, Senator Coleman, and Members of the Subcommittee. My name is Bruce Hammonds and I am President of Bank of America Card Services. 

Bank of America is one of the world’s largest financial services 

institutions. In the United States, Bank of America serves more 

than 52 million customers, nearly half of all U.S. households. As 

you may know, we are one of the largest credit card companies in 

the United States. 

I have personally been involved in consumer lending for over 35 

years and was part of the management team that formed MBNA 

in 1982. During my career, I have been personal witness to extraordinary changes in the card industry, driving the product from its 

origins as a pay in full charge card with an annual fee to a far 

more versatile product offering seamless access to credit for millions of Americans. 

Widespread access to credit cards has also played a significant 

role in our economy, allowing merchants, either at the point-of-sale 

or over the Internet, to accept payments quickly and securely. 

Mr. Chairman, we were pleased to host Subcommittee staff as 

they visited our credit card operations in Wilmington and hope this 

experience helped the Subcommittee gain a deeper understanding 

of our operations and practices. 

For years we have always been a leader in fair and transparent 

lending. Let me explain. Bank of America has never engaged in 

double cycle billing. Bank of America has never engaged in universal default. Bank of America already limits the frequency of 

risk-based repricing. Bank of America already has a program that 

lets customers know through e-alerts when they are approaching 

due dates and credit limits so they can avoid fees and repricing. 

Bank of America already has a robust program to educate our 

customers about their credit. We have been testing a plain language brochure that advises our customers of steps they can take 

to keep the cost of credit lower. 

I am proud to say that we arrived at these policies some time ago 

and by listening to our customers. 

With that, let me return to the remainder of my remarks. 

As Bank of America approaches the credit card market, that is, 

as we make our pricing terms and marketing decisions, our decisions are shaped primarily by four factors: Competition, risk, return, and regulation. Credit cards are now so ubiquitous that it is 

easy to forget a time not so long ago when access to credit was a 

29

privilege reserved for those on the higher end of the financial spectrum. Vigorous competition in this market has democratized access 

to credit and produced three primary benefits for consumers: lower 

prices, innovative products, and better customer service. 

As the 2006 GAO report on credit rates and fees observed, consumers now pay lower interest rates than they did when credit 

cards were introduced in the 1950s. Over the past 15 years, in particular, issuers have competed for customers by offering attractive 

rates and expanding the availability of credit to a much larger segment of the population. 

Credit cards have not only become cheaper for consumers but 

also, thanks to innovation, far more useful. A credit card now allows you to obtain instantaneous credit when purchasing at the 

point-of-sale or online, or to obtain a cash loan from an ATM, anywhere in the world in any currency. Credit cards also frequently 

come with other rewards, originally frequent flyer miles but now a 

wider and ever-expanding list of rewards. 

The other way we compete is through superior service. If there 

is a problem, you can call us 24 hours a day, 7 days a week. And 

if your card is lost or stolen, we will replace it for free and you will 

not bear any costs from fraudulent use of the card. 

Just as our approach to the market is shaped by competition, it 

also considers the risk of this unique type of unsecured lending. We 

manage risk in three primary ways. First, we issue cards only to 

those who have a credit history or an existing relationship with us 

that suggests an ability to repay. For this reason, we have not been 

active in marketing loans to the subprime market. 

Second, we employ risk-based pricing, which allows us to continue lending to customers who failed to pay on time, go over limit, 

or exhibit other risky behavior. 

Third, we identify and work with customers who are experiencing real financial difficulties. Frequently, that means lowering 

their interest rate and waiving fees, and working with consumer 

counseling agencies to ensure that credit problems with other lenders are made part of the plan. 

I will focus on risk-based pricing, as the Subcommittee has expressed interest in it. 

Risk-based pricing takes two general forms. First, our contract 

with the customer provides for default repricing, that is higher interest rates that apply in the event the customer makes payments 

late or exceeds their credit limit. This is how most of our repricing 

occurs. 

As a matter of practice, we take this action only if a customer 

is late or over limit twice within a 12-month period, though some 

of our competitors are more aggressive and impose higher rates 

based only on one event and include using a bounced check as a 

trigger. 

Additionally, in late 2007, Bank of America plans to further implement a feature that will provide for a cure to a lower rate if the 

customer has no late or over limit events for 6 consecutive months. 

This new lower rate will apply to both existing and new balances. 

Second, when we see that a customer is exhibiting risky behavior, and this may include problems with other lenders, we may notify the customer of a proposed change in terms of the account, 

30

generally a higher interest rate for outstanding balances. This is 

known as risk-based repricing. 

Risk-based repricing is necessary in credit card lending because 

credit card lending is open end credit. As such, a credit card relationship involves a series of loans of varying amounts over an indefinite period, whereas closed end credit, for example an auto 

loan, constitutes a single loan made for a specified maturity on 

terms fixed at the outset of the leading relationship. 

Basically, if a deteriorating credit score causes us to question our 

initial decision to issue credit, we will inform the customer that in 

the future his or her account will have a higher rate. 

I should stress that whenever we propose a higher interest rate, 

the customer has a right to simply say no. The customer is then 

entitled to repay any outstanding balance under the original terms, 

rather than the adjusted terms we are proposing. At that point, basically, we cannot charge a higher rate on loans the customer has 

outstanding but the customer can not continue taking out new 

loans at the old rate. That seems right to us. 

This right to say no is a crucial distinction between risk-based 

pricing, which we and all of our competitors engage in, and universal default, which Bank of America has never engaged in. With 

universal default, a default to an unaffiliated creditor is treated as 

a default on every creditor and triggers repricing without any right 

to say no. As noted, Bank of America has never engaged in universal default. 

I would also note that we have never engaged in two cycle billing, another practice I know is of concern to the Subcommittee. 

I should also add that at Bank of America we do not propose a 

risk-based increase in rates to customers in the first year of the relationship. And once a proposed change in terms is accepted, will 

not propose another change for at least 6 months, even if the customer’s credit score declines further. 

Now let me turn to the reason we are in this business, which is 

to earn the maximum possible risk-adjusted return for our shareholders. Of course, the primary constraint on our returns is market 

competition. As the GAO report notes, the return on assets for 

large credit card issuers has generally been stable since 1999, with 

returns in the 3 percent to 3.5 percent range. Data from five of the 

six largest issuers showed that profitability between 2003 and 2005 

has been stable, in the range from 3.6 to 4.1 percent. 

On the regulatory front, we support the Fed’s revision of Regulation Z and look forward to commenting further. 

Thank you for the opportunity to share our story and our views 

with you, and I look forward to answering any questions you may 

have. 

Senator LEVIN. Thank you, Mr. Hammonds. Mr. Srednicki. 

31

1The prepared statement of Mr. Srednicki with an attachment appears in the Appendix on 

page 115. 

TESTIMONY OF RICHARD J. SREDNICKI,1 CHIEF EXECUTIVE 

OFFICER, CHASE BANK USA, N.A., WILMINGTON, DELAWARE 

Mr. SREDNICKI. Mr. Chairman and Members of the Subcommittee, good morning. My name is Rich Srednicki. I am the 

Chief Executive Officer for Chase Bank USA, N.A. 

I want to begin my remarks with a public apology to Mr. 

Wannemacher. We have policies and procedures in place at Chase 

to identify customers like him who have fallen into deep financial 

trouble and are finding it difficult to work their way out. In this 

case, we simply blew it. Our policies and procedures failed, and we 

deeply regret it. We took some action after hearing of his case from 

this Subcommittee. But we would have done the same with another 

customer who our procedures failed and who had contacted us. 

We have reached out to Mr. Wannemacher personally and resolved the situation to his satisfaction, as we would do with anyone 

with whom we had made a mistake. 

We believe this case is an exception and not the rule. It was 

caused by human error. However, we are reviewing our files and 

contacting all customers who are chronically over limit or have 

chronic late fees to let them know we have assistance programs 

that can and should help them, as we normally do. 

We serve 100 million customers and, regrettably, mistakes can 

happen. We are committed to finding those errors and to fixing 

them. 

We have decided to modify one practice we believe would have 

helped Mr. Wannemacher and we believe will help avoid future situations like this. We will now stop over-limit fees at 90 days. This 

change is in keeping with our overall efforts to continually review 

our policies and practices to find ways to improve customer service 

and satisfaction. 

I assure you that Mr. Wannemacher is not an example of how 

we strive to do business. When our customers are facing serious financial distress it is both in our customer’s interest and the bank’s 

interest to work closely with them to help them find the right solution such as consumer credit counseling programs or a payment 

plan with no fees and/or low interest rates. 

About .5 of 1 percent of our customers are in such programs 

today and more than two of three of those customers complete 

them successfully and get themselves back on their feet. That is 

what we should have done with Mr. Wannemacher. That is what 

we failed to do. 

We are committed to dealing fairly and responsibly with customers who face financial difficulty, as we are with all of our customers. 

Mr. Chairman, I want to also talk about Chase and the relationships we work hard to develop. The great majority of Chase’s customers fall into the categories that our industry calls super-prime 

and prime. That means that regardless of income, they are among 

the most responsible and knowledgeable credit card customers in 

the country. They use their cards wisely to manage their purchases 

and receive the convenience, the protections, the instant access to 

32

1The prepared statement of Mr. Atal appears in the Appendix on page 128. 

credit and flexibility payment cards bring while avoiding fees and 

maintaining very low interest rates, among the lowest in the country. 

Fully 92 percent of Chase customers begin and end the year with 

the same or better contract interest rate because they manage their 

credit responsibly. 

In order to build long-term relationships, we owe our customers 

clear and simple rules of the road so that they understand their 

fees, their interest rates, and know how to avoid late fees and over 

credit limit fees or have their interest rate increased. We provide 

account information in everyday language and want to help them 

meet this goal. We owe our customers, also, tools to help them 

manage their accounts and make on-time payments. We have free 

alerts that remind customers by e-mail, by telephone, or by text 

messaging when a payment due date is approaching or when their 

spending has reached their own self-determined limit. 

We also allow customers to pick their own billing due date, one 

that best meets their budgeting needs. And we never change that 

due date unless they ask us to change it. 

We owe all of our customers individual attention and we grant 

credit individually. Particularly when customers get into trouble, 

they need individual attention, and when their distress may be 

caused by factors like illness or job loss that are out of their control. 

In cases like these, we owe our customers a process for helping 

them get out of debt through credit counseling and debt reduction 

plans. 

The point that I want to underscore is that Chase is committed 

to working responsibly with our customers. Our core business 

model is based on responsibly providing excellent credit products to 

customers who use them responsibly. I believe that when we work 

with customers and treat them fairly we can be proud of a credit 

card system that is working extremely well for the vast majority 

of millions of Americans who use them every single day. 

Mr. Chairman, we look forward to working with you and the 

Members of this Subcommittee. 

Senator LEVIN. Thank you so much, Mr. Srednicki. Mr. Atal. 

TESTIMONY OF VIKRAM A. ATAL,1 CHAIRMAN AND CHIEF EXECUTIVE OFFICER, CITI CARDS, GLOBAL CONSUMER 

GROUP, CITIGROUP, INC., NEW YORK, NEW YORK 

Mr. ATAL. Thank you, Chairman Levin and Members of the Subcommittee. My name is Vikram Atal and I am the Chairman and 

Chief Executive Officer of Citi Cards. 

Citi Cards is a large entity, employing over 32,000 employees at 

more than 30 sites across North America, and we do our very best 

to meet the needs of our customers with a broad range of financial 

products and services. 

I appreciate the opportunity to appear before the Subcommittee 

today. 

I understand that the Subcommittee’s primary focus today is on 

issues relating to the transparency and fairness with which we 

33

treat our customers, and we welcome that conversation. At the outset though, I would like to step back and provide some context. 

Credit cards have become an integral part of our Nation’s economy, 

providing real and significant benefits to our consumers and merchants alike. To understand this business, it is crucial to recognize 

that each and every time a person uses a credit card to buy something we are, in effect, making them an unsecured loan not backed 

up by any tangible security as mortgages, auto loans, or home equity lines of credit are. We are lending money based only on a customer’s promise to repay. 

Before the late 1980s, the credit card market was much narrower 

and more uniform. Customers were typically assessed a $20 annual 

fee and interest rates were nearly 20 percent across the board. In 

the last 15 years, this model has changed dramatically. Underwriting practices have become more refined, allowing banks both to 

offer lower-priced credit for people with solid credit histories and 

to extend credit to customers who previously had no access to unsecured credit. 

The capacity for banks to consider risk is the key that makes this 

system work. Without that, less credit-worthy consumers would 

have fewer appropriate means of accessing credit, relatively riskfree consumers would face a higher cost of credit, and bank lending 

strategies would be significantly curtailed. 

As a general matter, this democratization of credit has been a 

good thing. Average credit card rates have declined nearly 6 percentage points compared to the average rate prevailing in 1990, 

and overall credit card debt remains a small portion of household 

debt, down from 3.9 percent in 1995 to about 3 percent in 2004. 

Finally, the lending model for credit cards is based on a relatively thin margin. Year after year we make roughly the same return of $2 to $2.50 for every $100 that we lend, which equates to 

about one dollar for every $100 of sales charged to credit cards. 

We have taken many steps in recent years to improve the products and services we offer our customers. Let me start by outlining 

two very significant changes that we announced just last week. 

Taken together, these represent a sea change for the industry. 

First, it has been standard practice for credit card issuers to consider raising a customer’s interest rates based on behavior with respect to financial commitments to other companies. Even before 

last week, we gave customers notice and the right to opt out of any 

such proposed increase in their interest rate while still maintaining 

full use of their card until the expiration date. 

But last week we eliminated the practice altogether for all customers during the term of their cards. Citi will consider increasing 

a customer’s interest rate only on the basis of his or her behavior 

with us when the customer fails to pay on time, goes over the credit limit, or bounces a check. 

Second, in order to be able to respond to general conditions in 

the financial markets the industry has traditionally kept the right 

to increase a card holder’s rates and fees at any time for any reason. We are eliminating this practice. Effective next month, so long 

as a customer is meeting the terms of his agreement with us, we 

will not voluntarily increase the rates or fees of the account until 

a card expires and a new card is issued. 

34

In tandem, these changes redefine our relationship with every 

single one of our customers. 

In response to customer expectations, we have also developed online tools to make it easy for customers to avoid late fees and to 

manage their relationship with us. Our customers can choose a day 

of the month they would prefer to pay their bills and they can elect 

to be notified in advance about key dates and information. Under 

this program we send out some 5 million alerts each month and 

that number is increasing substantially over time. 

Citi is an industry leader in financial education and literacy. The 

centerpiece of our education effort is our Use Credit Wisely program, a web-based program designed to assist consumers in understanding how credit works, budgeting, and how to work through 

difficult situations such as disability or living on a fixed income. As 

part of Use Credit Wisely, we developed the innovative Credit–ED 

program to provide support and the latest resource to help students 

manage their credit and money responsibly. Since 2000, the Credit–ED program has distributed more than 5 million credit education materials free to students, administrators, and parents. 

Citi is also an industry leader in protecting customers from theft 

and fraud. In 1989, we offered consumers our fraud early warning 

feature. In 1992, we introduced the photo card to help deter unauthorized use of credit cards. And today, should our members become victims of identity theft or fraud, we offer, for free, Citi Identity Theft Solutions. Our service streamlines and simplifies the entire process of reestablishing a victim’s identity and credit history, 

saving the customer significant time, money, and hassle even if the 

fraud happened on another credit card. 

Credit card disclosures can be confusing, so our goal is to assure 

no surprises for our customers. This means that all of our written 

materials must describe our products clearly, accurately and fairly. 

The effective and simpler to read disclosures cited by GAO in its 

September 2006 report on credit cards were Citi disclosures. 

We are also in the midst of a major redesign of our customer 

statement, working with some 2 million customers to understand 

how we might make them even better. 

Mr. Chairman, at Citi we put our customers first. We want to 

make sure that our customers’ Citi Card is a convenience that can 

make managing their financial affairs as easy and as stress-free as 

possible. This job is never finished and we know that there is always room for improvement. 

I look forward to answering any questions that you and other 

Members of the Subcommittee may have. 

Senator LEVIN. Thank you, Mr. Atal. 

Mr. Wannemacher exceeded the $3,000 credit limit on his account by $200, and he was then charged an over-the-credit-limit 

fee—not three times when his purchases put him over-the-limit, 

but 47 times. And the fee increased over time from $29 a month 

to $39 a month. For the 5 years that this went on, the total overlimit fees charged him each year exceeded the $200 for which he 

was being penalized. 

In 2006, he entered into a repayment plan to address this issue. 

Now, until recently, Mr. Srednicki, was it standard practice at 

Chase to apply the over-limit fee not just to the month in which 

35

a consumer’s purchases exceeded the card limit, but also every subsequent month, even if the consumer did not make any more purchases until your announcement here today? 

Mr. SREDNICKI. Yes, Mr. Chairman, it was our policy and I believe an industry policy, to apply an over-limit fees for every month 

that the customer is over limit. But the most important thing for 

us is to try to prepare information and give information to our customers so that they do not get into an over limit or a late condition 

on the account. And the vast majority of our customers, the very 

vast majority, do not. 

Senator LEVIN. When did you make the decision to eliminate this 

previous practice or this practice? You are announcing it here today 

but when was this decided? Yesterday? A week ago? When was this 

decided? 

Mr. SREDNICKI. We decided this a few days ago, after actually 

getting information from this Subcommittee about Mr. 

Wannemacher and looking at his account. 

Senator LEVIN. You have changed the practice across the board 

though, now? 

Mr. SREDNICKI. Yes, sir, we are changing it. 

Senator LEVIN. We understand from you, Mr. Hammonds, that 

the practice at Bank of America is not to charge these consecutive 

fees; is that correct? 

Mr. HAMMONDS. Mr. Chairman, we charge three times, and then 

our practice is to stop at the third. 

Senator LEVIN. How long has that been the case? 

Mr. HAMMONDS. I am answering for two companies. I was involved in the merger, so I am answering for two separate companies. 

Three years at MBNA. I am not exactly sure at Bank of America. 

After the two companies came together at January 1, 2006, I know 

that was put in place. 

Senator LEVIN. We have an example. We have reviewed a Michigan constituent’s Bank of America credit card account and found 

that he was charged seven over-the-limit fees, once each month 

from March 2006 to September 2006, even though he stopped using 

his card in April 2006. 

So that would have violated the practice that you said was in 

place no later than early 2006; is that correct? 

Mr. HAMMONDS. That is absolutely correct, Senator. 

Senator LEVIN. We will show you that. Something is wrong with 

your computer. 

Now, Mr. Atal, what is your practice on this issue? 

Mr. ATAL. We charge over-limit fees only three times, Senator. 

Senator LEVIN. How long has that been the case? 

Mr. ATAL. I will have to get back with you, Senator, with the 

exact timeline. I don’t have that but I believe it’s been in place for 

a while. 

Senator LEVIN. Still, I gather, many credit card companies 

charge the repeated over-limit fee; is that correct? You have now 

announced your change at Chase, and the other two banks represented here today say it has been the case for a year or more 

that three times is the most they charge. 

36

Our understanding is that the common practice in the industry 

is still to charge these repeated fees. Is that your understanding? 

That it is common practice? Or don’t you know? 

Mr. HAMMONDS. Mr. Chairman, the OCC has encouraged the 

practice of no more than three times. 

Senator LEVIN. You do not know how many credit cards companies comply with that? 

Mr. HAMMONDS. I do not know how many. 

Senator LEVIN. Do you know? 

Mr. SREDNICKI. No, I do not. 

Senator LEVIN. Do you know? 

Mr. ATAL. I do not know, sir. 

Senator LEVIN. I want to talk to you about the interest that is 

charged on money that is paid on time. In the example that we 

used in our opening statement, to make this point very clear, we 

just created a hypothetical bill of $5,020, no previous balance. They 

pay $5,000 on time. A $20 balance the next month with no additional purchases. They are hit with an interest charge of $55.21. 

This may not be a typical payment approach, but nonetheless we 

are using this to clarify what we are talking about. 

In that situation, interest is charged for the first 15 days on the 

$5,000 that is paid on time, not just on the $20 that was not paid. 

Now what is the justification for charging interest on debt that is 

paid on time? 

Mr. Srednicki, do you want to start? 

Mr. SREDNICKI. Senator, I believe that this practice really is as 

simple as charging interest for as long as the money is borrowed. 

And if the customer was statemented on the 15th of the month, he 

was statemented with interest through that date. When he makes 

his payment, from that date on, the original balance was still due. 

We deduct the $5,000 from that payment and charge for the 

number of days that the customer has borrowed the money. I believe that is the same kind of interest rate that financial companies 

charge on things from mortgages to other financial loans. 

Senator LEVIN. You folks, all the credit card companies, hold out 

that there is a grace period on purchases; is that correct? You talk 

about a grace period. 

Mr. SREDNICKI. There is a grace period on purchases for customers who transact, that is, who pay their bills in full every 

month. And fully 30 percent of our customers never pay interest on 

their purchases. 

Senator LEVIN. I understand that. Do you think most customers 

understand that the grace period only applies to people who pay 

their bill in full every month? Do you think most people understand that? Mr. Wannemacher sure did not. 

Mr. SREDNICKI. I think that the large majority of our customers 

do understand that, sir. 

Senator LEVIN. I disagree with that, by the way, and I think our 

expert here also disagreed with that. Because you tout, you advertise a grace period for purchases that are made. I would like to see 

in your advertisements where you say that grace period does not 

apply unless you pay the entire amount and you will be charged 

interest on money that you pay on time. 

37

I do not think your advertisements say that. I do not think the 

ordinary consumer understands that or believes that it is fair. I do 

not believe it is fair. It is very clear to me that if you get a bill 

on January 1 that says $5,020 is owing, the due date is January 

15, and there is a minimum payment, but that if you pay less than 

the full amount that you are still going to be charged interest on 

the amount that you paid on time. I do not believe that the average 

consumer understands it, believes it, thinks it is fair. And I do not 

either. 

Now your explanation as to why you believe that is justified, to 

me, I did not understand your explanation. In simple terms, I did 

not. Maybe others did and I do not want to say that just because 

I did not does not mean it was not clear or comprehensible. But 

I did not understand your explanation. 

Let me try Mr. Hammonds. Why should people who pay their bill 

on time or pay part of their bill on time be charged interest on the 

part that they pay on time? 

Mr. HAMMONDS. Mr. Chairman, there are two ways that customers use a credit card. There are transactors, that is about 50 

percent of our base, who pay their balance in full each month. So 

essentially, for that 30 days, we are supplying them with an interest free loan. We have costs with that loan. We have risks with 

that loan, but we are giving that loan to them for free. 

Then there are other customers who borrow on their credit cards. 

Just as Mr. Srednicki said, the calculation for those is exactly the 

same as an automobile loan or a mortgage loan or anything else. 

You pay interest as long as the balance is out there. Once you pay 

the balance off, you can become a transactor again. And people 

come and go, and use it in both ways. 

Senator LEVIN. Do you think that your advertisements and your 

solicitations and your bills make it clear to people that if there is 

a balance they are going to be charged interest on the money that 

they pay? I know that in some of your solicitations that is clear, 

but do you think that is the general understanding, even though 

some of your solicitations may have it, that the grace period only 

applies if there is no balance? Do you think that is the common understanding, Mr. Atal? 

Mr. ATAL. Senator, I think that there is always an opportunity 

to continually inform consumers about the terms and conditions 

under which they are taking on credit. We try each and every day 

to enhance our interaction with consumers and we will continue to 

do that. 

Senator LEVIN. I know that some banks do say that the grace period only applies if there is no balance. I do not think that is either 

commonly described or commonly understood, and I would think it 

is critically important because this is something that strikes me as 

being so fundamentally unfair that I would hope that you would all 

do what some banks do relative to the grace period to make it clear 

that it does not exist. 

You should not even use the term, I believe, except for those people—making it clear that it is only available to those people who 

have no balance on their bills. 

On the trailing interest issue. I do not know if you use the term 

trailing interest, but you heard me describe the trailing interest in 

38

that exhibit this morning. That even though in some cases, which 

we have outlined here, you pay in full, on time, that there still 

would be an interest charge the next month. 

I do not know what you call that, but we are calling it trailing 

interest. Do you believe that is fair? That someone gets a bill on 

February 1, and the bill is $55.21, the due date is February 15. The 

person pays the entire amount on February 15. Shouldn’t they then 

assume, assuming there’s no more purchases, that is it? Mr. Hammonds. 

Mr. HAMMONDS. Again, Mr. Chairman, I think we make it clear 

to our customers that to avoid finance charges, or to avoid borrowing charges, you have to pay the entire balance in full. Again, 

just like an automobile loan, if you do not pay the entire balance 

in full, the next month you will have interest from the previous 

month. 

Senator LEVIN. But they did pay the balance in full. February 15, 

they paid the entire balance in full, $55.21. 

Mr. HAMMONDS. I am not as current on that—I cannot comment 

on that particular example. 

Senator LEVIN. Mr. Srednicki, do you know what we are saying? 

Mr. SREDNICKI. I think I understand the example and this customer has been revolving, as we call it. I do not know the exact 

calculations in that particular example. 

But I would agree with Mr. Atal that we could improve the disclosure to our customers and try to make sure that our customers 

really understand. 

I would also comment, sir, that I think bank cards, in general, 

offer customers, for most part, extremely competitive rates. It is a 

very competitive industry. And customers who do pay their balances in full have extremely good rates, and we have particularly 

good ones. 

Senator LEVIN. Thank you. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. 

I find this testimony this morning very helpful and thank each 

of you because you represent institutions that I sort of grew up 

with. They are the institutions—Chase goes back to the early 

1800s, does it not? Is that not right? 

Mr. SREDNICKI. Yes, sir. 

Senator WARNER. These are the institutions that have built our 

Nation and I know you wanted to be in this business because the 

credit card is essential to our growing economy. There is no way 

in the world you could erect enough buildings to service everybody 

that would have to come in and borrow and look at a bank officer 

to make these, as Mr. Atal said, unsecured loans. 

So you start with the premise it is an unsecured loan and, therefore, it has a higher degree of risk and you are entitled to a reasonable profit. And you have also got to remain competitive. I understand there is some 6,000 depository institutions which issue credit 

cards, but the majority of accounts apparently have gravitated to 

your institutions or institutions of a like nature. 

So now we come along and it is obvious that we have to do something to help people manage their own lives and not fall into the 

traps that the credit card has the potential of doing. 

39

Now let us talk a little bit about how the Federal Reserve is 

working to issue new regulations for disclosure requirements. Are 

you at liberty, any of you, to share with the Subcommittee today 

some of the ideas you are contributing in this process? I assume 

each of you or your subordinates are involved in working with the 

Federal Reserve on this; am I correct? 

Why don’t we just proceed as we have before. Mr. Hammonds. 

Mr. HAMMONDS. Yes, Senator, we are. And we would be very 

happy to see some changes made there. We proposed some things 

that almost are like what you might see on a can of soup describing 

the ingredients, something that simple. 

I will say to you, it is not the most simple process in the world. 

Our customers, and we know this from listening to them constantly, like a lot of flexibility in the product. So to try and describe 

everything that we might offer to a customer and do so across all 

institutions so they can compare products is not quite as easy as 

can be done on a can of soup. But we think, absolutely, there are 

many improvements that could be made and we should try and do 

so. 

Senator WARNER. You mentioned—I caught the phrase and I 

wrote it down—a plain language brochure. Have you made a copy 

or would you make a copy or copies, plural, to the Subcommittee? 

I, personally, would like to read that over. 

Mr. HAMMONDS. Absolutely, yes, sir. We will do so. 

Senator WARNER. The Chase representative said you have—and 

I wrote this down—clear and simple rules of the road. I like that. 

And in every day language. 

How is that put out, Mr. Srednicki? Is it a brochure? 

Mr. SREDNICKI. It is a brochure that we send to our customers 

to make sure that they understand our billing practices, encouraging them to pay their bills on time, stay below their credit line, 

and better manage their credit. We also encourage customers, 

when they do have a problem that is intractable, to please call us 

because we would like to help them get on to a program that meets 

both their needs and our needs. 

Senator WARNER. Now, would you make copies of those letters or 

however you call it, a brochure or whatever, available to the Subcommittee? 

Mr. SREDNICKI. Yes, sir, I would be glad to. 

Senator WARNER. With regard to the Federal Reserve, are you 

active participants in that process? 

Mr. SREDNICKI. We are active participants, and we do support 

better, clearer, simpler disclosure for consumers, and we would be 

glad to work with them to get it done. 

Senator WARNER. I recognize the antitrust complexities that you 

have to stay within your lanes and be careful, and I am sure that 

is being done. Where are we in the process with the Fed? Do you 

think we are making progress? 

Mr. SREDNICKI. I think we have suggested things that we can do. 

We would work with them to improve anything that they come up 

with. And we would support having them gather folks under legal 

protection to make sure that we vet and improve disclosure to customers. We would all love to be on an equal playing field. 

40

Senator WARNER. Are you at liberty to give this Subcommittee 

copies of your submissions to the Fed, the idea that you have provided? 

Mr. SREDNICKI. I would be glad to give them. I do not know exactly where we are on it. I know that we have been working on 

new disclosure. 

Senator WARNER. Mr. Hammonds, would you be willing to do 

that? 

Mr. HAMMONDS. Yes, sir, we would. 

Senator WARNER. I think, Mr. Chairman, that would be helpful 

to us. 

As a wrap-up here in the few minutes I have left, Mr. Atal, what 

is your position on the Fed process? And would you be permitted 

to— 

Mr. ATAL. Absolutely, Senator, yes, we would. We actually have 

already introduced to all of our customers, in addition to the highly 

complex and multi-page agreements that we send out that attempt 

to comply with the laws and regulations and inform them, but they 

are quite complex. We are already sending out a one-pager that is 

defined as similar to how Mr. Hammonds described the food labeling process. 

But we will be absolutely willing to share with you what we are 

sharing with the Federal Reserve, and we are actively engaged in 

the process and looking forward to it. 

Senator WARNER. I thank you for your contribution on that, too. 

Mr. Chairman, I thank you for this opportunity. 

Senator LEVIN. Thank you. Senator Carper. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Thanks, Mr. Chairman. 

And to each of our witnesses here today, thank you for coming. 

Thanks for your prepared testimony and for your response to our 

questions. Thanks for working with the Fed and other regulators 

as we try to address some of the concerns that have been aired 

here today. 

I missed most of the first panel’s presentation. I was involved in 

another meeting. But we express our thanks to Mr. Wannemacher 

for coming. 

I just want to say to Mr. Srednicki that I found it refreshing that 

you would issue a public apology on behalf of your bank to a customer who was wronged, unintentionally, but wronged. I do not 

know how many credit cards you have out, Mr. Atal, but I understand it is in excess of 100 million. I think I heard Mr. Srednicki 

say they have about 100 million out. Mr. Hammonds, would you 

have 100 million or so out? 

With that many credit cards, you make mistakes. God knows we 

make mistakes in our business. Sometimes it is the way we vote, 

hopefully not often. Sometimes, we make mistakes in simply not 

returning calls or responding properly to people who e-mail or who 

write us. We get a lot of e-mails and phone calls, as you might 

imagine. 

I always like to say everything that I do, I can do better. And 

we focus on our motto within our Senate office, is ‘‘if it is not perVerDate 0ct 09 2002 10:41 Nov 07, 2007 Jkt 034409 PO 00000 Frm 00046 Fmt 6633 Sfmt 6601 C:\DOCS\34409.TXT SAFFAIRS PsN: PAT
41

fect, make it better.’’ It sounds like that is part of your DNA, as 

well. 

Sometimes we have hearings here and they are on rather esoteric subjects. And it is difficult for us to identify the range of 

issues before us. That is not the case today. I am sure all of us 

have credit cards. I have several credit cards, one for my personal 

use, one for political campaign use, one for expenses that relate to 

my official business. And they are actually very helpful, enabling 

us to leave a paper trail, make sure that the proper charges are 

fixed and paid for in an appropriate way. 

I am one of those customers that you probably do not like to have 

a lot, because I always pay my bill on time. I use every single day 

of that grace period and try to shop around for cards that provide 

the benefits that we want. 

And it sounds like about half of your customers at Bank of America do that, and maybe a third or so of your customers at J.P. Morgan do that, as well. 

I would comment, sitting here listening to this testimony—we 

had a previous hearing that you are familiar with that the Banking 

Committee held that Senator Sununu and I were part of. 

I emerged from those hearings and this one today more firm 

than ever in the belief that if we could somehow harness market 

forces, harness competitive forces, inform consumers to make sure 

that our regulators are on the ball—not just soliciting input from 

consumers, from the industry and all—and holding, from time to 

time, hearings like this to put a spotlight on good practices. And 

I would argue that the folks before us today, Mr. Chairman and 

colleagues, are more arguably the white hats of the industry. The 

folks we really ought to have before us here are some of the folks 

that are traditionally lending to a subprime consumer base. 

But those are not the folks that are here today. There is an old 

adage, people who write editorials are folks who come onto the battlefield when the shooting is over and shoot the wounded. That is 

not exactly what we are doing here today, but the folks that we 

ought to be shooting at are not necessarily the folks that are presented here. 

When I first got my first credit cards, I looked at the amount of 

interest, I looked at the grace period, I looked at the annual fee. 

It was pretty easy. We did not have all these myriad fees that are 

in place today. 

How do we go about harnessing competitive forces and market 

forces to provide consumers with the ability to actually shop and 

make informed decisions for themselves, better decisions? That was 

easy when I was young and it is not so easy today. 

Mr. Hammonds, could we start with you, please? 

Mr. HAMMONDS. As I said, Senator, it is not as easy as you might 

think because customers want a great deal of flexibility. Some customers want to use cash. Some customers want to use rewards programs. Some customers want discounts on other banking products 

as a result of the use of their credit card. 

And so, describing simply all of those features while giving all of 

that flexibility is not as easy as someone might first think. It is not 

just thinking about only one way to use a credit card. 

42

But we know from listening to our customers, that is what they 

want. They want that kind of flexibility. Many customers have 

three or four different credit cards and use them in three or four 

different ways. They might borrow on one, use one for a rewards 

program, and use one for business, as an example. 

So I think there are things we can do to improve the process and 

again, I think working with the Federal Reserve, as well as trying 

more of these things like the brochures that I think we have all 

described—some clearer language to customers outside of Regulation Z—as well as all of the other educational efforts that we have 

going, whether it is with students or others, are the things that are 

needed in the industry to help make it easier for customers to understand more about their credit cards. 

I will say, Senator, I spend a tremendous amount of time listening to customer calls and going out to banking centers talking to 

customers. I do think the vast majority of our customers do understand our products and do understand how to use them. 

Is there some confusion? Absolutely. But I can tell you the vast 

majority of our customers do understand how to use the card. 

Senator CARPER. Mr. Srednicki. 

Mr. SREDNICKI. I would agree with everything that Mr. Hammonds has said, and say that I believe that we should have a uniform kind of disclosure and in very simple language. As simple as 

we can get it, recognizing that we do represent a lot of sophisticated products, different types of reward structures, different types 

of customers who use the product very differently. 

But I think that we can do better at our disclosure and we would 

be willing to work on Regulation Z with the Fed. 

Senator CARPER. Mr. Atal, before you speak, let me just say I am 

aware of the very good work that Citibank does with respect to financial literacy. You are active in our own State and some of our 

own schools. And I know that is true of your competitors here. 

Go ahead, if you would just respond to my question. 

Mr. ATAL. I would echo the comments of my colleagues here, Senator. As an example, we have over 300 products available through 

Citi Cards’ business. So it is an option set that we have created for 

customers. On our Internet site, if you decide that you want a credit card from us, we ask you a number of questions. And you can 

self-select down into the products and features that you would like 

and reduce the level of optionality. 

But it is a complex choice for customers to make amongst all the 

different credit cards that are available. Anything that we, as industry leaders, could do as well as supported by your Subcommittee and Senator Levin’s focus on this would be positive to 

the industry. 

Senator CARPER. Mr. Chairman, in closing, I would just say that 

looking back at the Banking Committee hearing that we had a 

month or so ago, and this hearing today, several of our witnesses 

here indicated they have changed practices that maybe did not 

stand up to the light of day. That is a very good thing. I think that 

is part of our responsibility, to invite them to appear before us and 

to hold out and question those practices as we are doing. 

It is just unfortunate that a lot of the other thousands of issuers, 

or a number of the other thousands of issuers whose practices are 

43

far less defensible than the ones we are hearing about today, could 

not undergo a similar kind of scrutiny. 

Senator LEVIN. Thank you, Senator Carper. Senator Coleman. 

Senator COLEMAN. Thank you, Mr. Chairman. 

I am the Ranking Member of the Near East Subcommittee of the 

Foreign Relations Committee, and King Abdullah of Jordan addressed the Joint Session of Congress, so I had to leave for that 

and did not get to hear the testimony. The staff has been briefing 

me. 

I appreciate the discussion about disclosure. What we have here 

are complex choices with serious consequences for failing to understand those choices, very serious, burdensome, sometimes oppressive consequences. 

Is it the sense, from what I heard from Senator Warner from Virginia, that you will be providing us some of the disclosure materials that you have been working on? Can you make this simple 

enough? 

You cannot fit everything into the Schumer Box anymore. Two 

questions: First, do you think it is clear enough where we are 

today? And second, do you have a clear plan of where we go tomorrow to actually have the average consumer understand what they 

are getting into and what the consequences of not paying in full 

during a grace period are? Can you do that, Mr. Atal? We will just 

go from right to left. 

Mr. ATAL. Yes, Senator, I believe we can. 

I think that we will absolutely make that effort and I believe we 

will be successful at it. 

Mr. SREDNICKI. I, too, believe we can do much better, Senator. 

I think our consumers, at least our consumers at Chase, are fairly 

sophisticated consumers. They do understand almost everything 

that we do. But I think we can make our disclosure better. I think 

we can make it more uniform. And I think we can improve the understandability of what we offer. 

Senator COLEMAN. Thank you. Mr. Hammonds. 

Mr. HAMMONDS. I agree with that. It is not good enough today, 

and we can make it better. 

Senator COLEMAN. One area where I have continued concern is 

the application of penalty interest rates to previously existing 

loans. I understand the concept of reevaluating risk. People’s circumstances change and these are ongoing loans. 

The concern I have is a situation where after somebody purchases something at a certain interest rate and expects to repay 

that balance at that interest rate, the customer is sometimes repriced to a much higher interest rate. So now something that they 

had bought—understanding these are the terms and circumstances 

of the agreement—is repriced so that they suddenly have a higher 

interest rate applied to that prior balance. 

I know that they often have the option of paying off their balance 

at that existing rate, but, for a lot of consumers, I do not know if 

they can—they have no real option to pay it off. That is probably 

why they borrowed, why they used the credit card in the first 

place. 

So, in the end, they made purchases expecting a rate of, say, 10 

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44

cent. My question to you is do you think it is fair? And are there 

alternatives to this? Mr. Hammond. 

Mr. HAMMONDS. Let me explain how we do it, Senator. We do 

evaluate risk. Where we see the risk change, we have to adjust 

price. As you said, these are open ended loans that theoretically 

never end. 

We send a proposal out to the customer at that point to change 

the rate. The customer has the opportunity to opt out or just say 

no. If they decide to do that, they can pay the account off over time 

but we do not extend them future credit. And we think that is a 

fair way of doing it. 

Senator COLEMAN. Mr. Srednicki. 

Mr. SREDNICKI. Senator, we think and we believe that a repricing 

of a customer is an individualized decision. For example, for every 

10 customers who are delinquent on their card, we do not reprice 

nine of them. We intentionally manage our risk by looking at the 

credit worthiness of that customer and how that customer behaves 

with us. 

On the other hand, I do agree with Mr. Hammands that riskbased pricing is integral to our industry because 20 years ago everybody was at 19.8 percent. It is an extremely competitive industry, 20 years ago everybody was at $20 membership fee. Today, 75 

percent of the cards do not even have fees. 

And we do need risk-based pricing in order to manage our business. 

Senator COLEMAN. Mr. Atal. 

Mr. ATAL. While I would concur with the statements that my colleagues have made here regarding the ability of the industry to 

risk-based price because we are, after all, in the unsecured loan 

business, I would reiterate the point that I made in my testimony 

that we, at Citi, have moved a major step beyond that. We will be 

communicating to our customers that, during the term of their 

agreement with us, we will not reprice them over the terms we 

originally established as long as they are meeting the conditions 

that we stated up front. That is a sea change, we believe, in our 

interaction with our customers. 

Senator COLEMAN. And I applauded that in my opening statement. 

Mr. ATAL. Thank you, sir. 

Senator COLEMAN. I think it is movement in the right direction, 

Mr. Atal. 

Mr. Chairman, are we going to have another round? 

Senator LEVIN. We will. 

Senator COLEMAN. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator Coleman. Senator McCaskill. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

First to all of you, do you all know the age of the customers you 

are soliciting? Mr. Hammonds, do you know the age of the customers you are soliciting? 

Mr. HAMMONDS. In most cases we do, Senator. The majority of 

customers that we solicit are our customers that are coming into 

our banking centers. That is the way we get most of our customers. 

We certainly know the age prior to deciding whether we approve 

or decline their applications. 

45

Senator MCCASKILL. In terms of the solicitations that you send 

out, though, do you know how old the people are that you are sending—you know 1.9 percent, get cash back, you are only going to pay 

1.9 percent interest that is all over the envelope on the outside. Or 

even more that really seductive thing that looks like if you open 

it there is a check inside. 

Mr. HAMMONDS. Senator, I am not sure that we do all of those 

things that you just described. When we solicit a customer, we do 

it one of two ways. We have a preapproved or pre-screened offer 

where we do know about the credit history of the customer and we 

know a lot of demographic information. 

In some cases, we have affinity groups, for example, where we 

do not have that information. When we do send an application, the 

customer has to respond, and then a credit analyst makes the decision as to whether we will approve it or not. So with that solicitation, we may not know the age but we will know it before we make 

a credit decision. 

Senator MCCASKILL. Do you have a cut off of age that you think 

is appropriate, either young or old, in terms of solicitation? 

Mr. HAMMONDS. Well, I believe we cannot legally enter into a 

contract with anyone younger than 18 years old, but not on the 

upper end, no. 

Senator MCCASKILL. So you would send solicitations potentially 

to somebody that is almost 79 years old that has a bad credit history on a frequent basis? 

Mr. HAMMONDS. Senator, somebody with a bad credit history, 

whether they are 20 or 79, is not going to be approved by Bank of 

America. 

Senator MCCASKILL. I will check with you later because I would 

disagree with that statement from personal experience. 

And so if my 15-year-old daughter got a solicitation last week, 

that would have been just because you are sending out mass solicitations and you do not know how old she is? 

Mr. HAMMONDS. It is possible but she would not have been approved had she responded. 

Senator MCCASKILL. And what about college students that do not 

have a credit history? Are you one of the banks that send credit 

cards that do not have a credit history because they made it to college? 

Mr. HAMMONDS. Senator, we have the endorsement, as a matter 

of fact, of about 800 college and college related groups that endorse 

our credit cards and we do approve credit card applications for college students after the same credit investigation that we do for any 

other customer. 

Senator MCCASKILL. When you have the approval of those campuses, do they receive compensation for that? 

Mr. HAMMONDS. Yes, they do. 

Senator MCCASKILL. So they get paid, the universities, for allowing you to send credit cards to their students? 

Mr. HAMMONDS. In many cases, they do. 

Senator MCCASKILL. Is a list of the universities that allow you 

to do that, is that a public list? Is that something you would share 

with the Subcommittee? 

46

Mr. HAMMONDS. I do not know. We have contracts with them. My 

guess would be that these are private contracts and we would 

not——

Senator MCCASKILL. I will go the other way. I will go to the universities and ask them because I think they would have to—I think 

if they are public universities that would be a public matter. 

These college students, if they are 18 or older, I assume they get 

these credit cards without their parents ever knowing, even though 

they are in college full-time and do not have income? 

Mr. HAMMONDS. First of all, you would find the vast majority of 

those that we approve would have income. They would have some 

kind of job. Some are done with their parents co-signing. Some are 

done on their own. In most cases, they have some credit already 

established. So we have credit criteria for students, just like anyone else. 

Senator MCCASKILL. Is the credit criteria for a college student 

the same as a customer that would maybe apply for a credit card 

that was 30 or 40 years old? 

Mr. HAMMONDS. It is, which also means that we look at income, 

debt to income, credit history and so forth. So if a college student 

was 40 years old and worked full time and was making money, 

they could get the same credit limit as someone else who was not. 

Senator MCCASKILL. I meant the other way around. Most college 

students do not have a long credit history. They have just left 

home. And so most college students are going to have maybe a 

part-time job, maybe not. Most of them, there may be a few of them 

that have wealth because of wealth in their family. But the vast 

majority of them are not going to have a credit history and they 

are not going to have any kind of assets. 

Frankly, I would have been shocked if somebody would have 

given me a credit card when I was in college, even though I worked 

as a waitress all through college. But it is very common now. I am 

curious how this came about. You may have explained it to me because I did not realize that the university campuses were getting 

paid for this. 

Mr. HAMMONDS. Senator, a couple of things. First of all, our average credit line across our portfolio is about $8,500. You would 

find, probably, a college student would have more like a $500 credit 

line. So the credit lines are going to be different. We find they are 

very good customers. 

Senator MCCASKILL. I bet. 

Mr. HAMMONDS. Their loss rates are not significantly different 

than anybody else. 

Senator MCCASKILL. They are not? 

Mr. HAMMONDS. No, Senator, they are not. They handle their accounts very responsibly. They have a right to have credit as much 

as anyone else does. 

I had two sons who went off to college in different parts of the 

country and, quite honestly, I would not have liked the thought of 

them being far away without having a credit card in their wallets. 

I think students need credit cards for all kinds of things, just like 

anyone else might need one, and just like everyone else, they need 

to handle it responsibly. 

47

We have a lot more education for those college students than we 

would normally do with most other customers, including a handbook that we give them when we solicit them, as well as in the first 

statement is a brochure that explains how they should handle credit. 

Senator MCCASKILL. I assume that the answers for the other two 

companies would be similar? You have agreements with college 

campuses that involve financial compensation in order to be able 

to send credit cards to their students? 

Mr. SREDNICKI. It sounds like we do much less college solicitation 

than the Bank of America. We do have about 12 agreements with 

colleges. We also, though, find that college students are very responsible borrowers, payers, and they perform relatively well. The 

average age of our portfolio is in the upper end of 40. It is a very 

experienced credit portfolio. 

We do not ever send out cards to someone who has had serious 

delinquencies. We never solicit them and we will not approve them, 

if they find us. 

Mr. ATAL. Senator, we have no endorsements with any universities in North America. We have had 20 years of experience in 

marketing to students at college. Consistent with the statements of 

my colleagues, we do find that college students, if we provide them 

with credit in a responsible way, will behave responsibly. We do 

not see loss rates higher than we would see for the general population. Our credit lines for college students are, in general, about 

20 percent of what we would provide to adults and they are able 

to handle that. 

In addition to all of that, we take great care and great interest 

in making sure that they receive the materials to be able to use 

their credit wisely. We have actually introduced a program with 

Drexel University where they have got a Credit–ED program just 

for Drexel University students. 

So we try very hard to inform them, to educate them, and provide them with products that would be suited to their needs. 

Senator MCCASKILL. I want to ask all three of you, and if you 

can take as little time on this as possible, although I know we will 

have another round, how much time each of you give your customers to pay their bill to avoid interest and penalties? How many 

days do you give your customers to pay their bill in full if they are 

trying to pay in full? Mr. Hammonds. 

Mr. HAMMONDS. It varies, but it is somewhere between 20 and 

30 days. 

Mr. SREDNICKI. It varies between 20 and 25 days. 

Mr. ATAL. It is the same for us, it is 20 to 25 days, Senator. 

Senator MCCASKILL. Why does it vary? 

Mr. HAMMONDS. Different customers want different kinds of accounts and behave diffently with those accounts. 

Senator MCCASKILL. And the customer has the control of that? 

Mr. HAMMONDS. It is part of the customer selection of different 

accounts. I mean, Senator, we literally have thousands of different 

kinds of accounts that we offer customers. It is part of the feature 

of the account. 

Senator MCCASKILL. I will not tell you which one of you I have. 

You may know. But I have one and I have struggled with getting 

48

this thing paid because there were times, particularly when I was 

building a home, that I was charging all of these things on this 

credit card through the Internet. 

Of course, we wanted to review the bill in depth because there 

was a lot of charges on it. And it was incredibly difficult to get that 

thing paid on time because I found out it was 20 to 25 days but 

it was from the time that they sent the bill, not from the time you 

received the bill. Is that true with all three of you? 

Mr. HAMMONDS. Yes. 

Mr. SREDNICKI. Yes. 

Mr. ATAL. Yes. 

Senator MCCASKILL. So it’s not from when you get the bill. It is 

20 to 25 days from when you send it. So when the customer gets 

the bill, they do not know what date you sent it. How are they to 

know how much time they have? 

Mr. HAMMONDS. There is a due date on the bill. 

Senator MCCASKILL. So let us assume the due date is 5 days 

from when you got the bill. You have only 5 days—and that is why 

finally—you say the customer gets to pick. Well, I should not say 

that. I am not a good customer because I pay the bill every month. 

But I struggled because I called. And I am not the average 

layperson. I am pretty aggressive, as you can tell. And I got on the 

phone with this company and said why am I getting these late 

charges because I am turning this bill around—in my experience 

most Americans who pay bills, you get 30 days. And I was turning 

that bill around within a week and invariably I was getting interest and late charges on it 

They said the only way—and then they finally told me well, on 

a certain day you can go on the Internet and see your bill. 

Well, the average customer is never going to know that. It took 

me 14 phone calls to get there. I had to do this and ask for another 

person and do this and then finally ask for a supervisor. And I finally got to the point that I figured out I could do that. But I do 

not think most customers ever can figure that out. 

Mr. SREDNICKI. Senator, we are spending a lot of time trying to 

inform our customers that they can go online, both to see their bills 

and to pay. I hope this customer, if we were your bank, we would 

have told you when you called in, you can pick the date for your 

payment, and it will never change once you do that. 

Senator MCCASKILL. But I cannot pick the date because I do not 

know when you are going to get the bill to me because the date 

starts running when you send the bill, which is—it would be one 

thing if I always knew the bill was going to be around for a week 

before the bill was due. But there have been times I have had less 

than a week that the bill has been due. 

Mr. SREDNICKI. You should never have less than a week to pay. 

Senator MCCASKILL. I will show you guys. 

My time is up. I am sorry. 

Senator LEVIN. We will have another round. 

Senator MCCASKILL. I am sorry. I got carried away. 

Senator LEVIN. Thank you. Senator Sununu. 

49

OPENING STATEMENT OF SENATOR SUNUNU 

Senator SUNUNU. Thank you, Mr. Chairman. I was finding the 

line of questioning very interesting, if nothing else. 

Gentlemen, I want to be sure that Senator McCaskill and Senator Carper are not driving you into bankruptcy. You are making 

money on interchange fees, aren’t you, off of these terrible customers that pay these bills at the end of every month? 

Mr. SREDNICKI. Yes. 

Senator SUNUNU. Excellent. I just want to make sure that customers like that are not a problem for you. 

I certainly appreciate the hearing and the testimony. I think it 

has been pretty direct and pretty frank. As Senator Carper said, 

we had a good hearing in the Banking Committee where some of 

these issues were discussed, and I want to say I appreciate the 

GAO report that was initiated by this Subcommittee. I had not 

read it in full until the last couple of days, but it has a lot of very 

good information, a lot of very interesting information about the 

trends in the industry, some very good, some that raise questions. 

But I think it is pretty thorough, pretty informative. 

There are a number of findings, some that have been discussed 

here, such as the importance of disclosure. You have spoken about 

it, Members have spoken about it—good disclosure and increased 

competition—the market forces Senator Carper talked about have 

been driving interest rates down and improving competitiveness or 

expanding competition across the industry. 

It is interesting to me that most customers avoid penalty and interest by paying off their cards. I think the GAO found it was close 

to 50 percent that pay off their card at the end of every month, a 

little bit higher than I would have thought. But obviously, if you 

then look at the disclosures that we have been talking about, they 

leave a lot to be desired. They are not always as clear as they could 

be or should be. There are some very important practices or key 

practices that you have talked about, that Chairman Levin has 

talked about, that obviously are questionable. And I think we appreciate the responsiveness in changing some of them. 

In fact, that is where I want to begin because I know that most 

of you talked about recent changes that you have made in your testimony. I was here for some of your testimony. I saw others when 

I was back in my office at a meeting, watching on the television. 

But I would like each of you to go through very briefly, I know 

you are repeating yourself, what practices have you changed recently and why? What is the simple most compelling reason for 

making those changes? Why don’t we begin with you, Mr. Atal. 

Mr. ATAL. Yes, Senator. The most important practice that we 

have changed recently has been the practice that I referred to earlier where we will, first, not change a customer’s price with us or 

rate on loan with us if they are in conformance with the terms of 

the agreement we have established. 

And second, we had, up until recently, the unilateral right to 

change the price for economic and financial conditions during the 

term of their contract. 

We have voluntarily agreed and we will inform our customers of 

that, that we will not change that price. 

50

What led up to that was obviously we have an ongoing dialogue 

with our customers. But quite frankly, the activities and the efforts 

of Senator Levin and this Subcommittee, as well as the Senate 

Banking Committee, has focused our minds and made us act quickly and in an important way and, I think, in a way that will be material to all of our customers. 

Senator SUNUNU. Mr. Srednicki. 

Mr. SREDNICKI. The most important practice that we just 

changed was eliminating over-limit fees for customers after 3 

months over limit. And we did that, frankly, after review of the Mr. 

Wannemacher account. 

Senator SUNUNU. Mr. Hammonds. 

Mr. HAMMONDS. Senator, many of the practices that you have 

heard described we have never done so we have not made any recent changes. 

We do have some programming going on right now where we are 

going to take customers who have been repriced up, and if they do 

not have a late charge or an over-limit fee in 6 months, reduce 

their rate down. 

Senator SUNUNU. So you are looking at the repricing issue and 

your over-limit fees were capped at 3 months prior? 

Mr. HAMMONDS. They were capped at 3 months already, yes. 

Senator SUNUNU. For each of you, what percentage of credit card 

holders are assessed over-limit fees? How common is that particular problem, which has rightly really received a lot of attention 

because of Mr. Wannemacher’s situation. Mr. Hammonds. 

Mr. HAMMONDS. Well, I do not know that exact percentage. I 

know, like Mr. Srednicki mentioned, only about 4 percent of our 

customers last year were risk-based repriced. I can tell you, as a 

percentage of our income, only 12 percent of our income, our revenues, come from either over-limit or late fees. 

Senator SUNUNU. Do you know what percentage of your customers have over-limit fees assessed? 

Mr. SREDNICKI. Senator, I do not know off the top of my head. 

Senator SUNUNU. Mr. Atal. 

Mr. ATAL. I do not know the number for our business, Senator, 

but I do recall, I believe, that in the GAO report it quoted that 

about 87 percent of customers had not paid an over credit limit fee. 

And I would assume that as a large issuer, we would be in a parallel position. 

Senator SUNUNU. Under 15 percent. 

Mr. Atal, what does your company do when a customer gets into 

trouble? 

Mr. ATAL. We have a very active program, Senator, to work with 

the customer. We would inform them about our different programs 

that are available. We invite them to call in and reach us on the 

statements we send to them. We will give them a number to call 

us. We would invite them to reach us via the Internet. And we 

send them separate mailings encouraging them to work with us in 

solving their issues. 

So we believe we make every attempt to work with customers to 

make the right decisions for them. 

Senator SUNUNU. Mr. Srednicki, have you changed the way that 

you approach customers who get into trouble over the last year? 

51

Mr. SREDNICKI. Sir, we have had a very active program over the 

last many years to contact customers who are having financial difficulty and enroll them in programs, both help programs, temporary programs, long-term programs, consumer credit counseling 

programs. 

A consumer credit counseling program would have been the right 

program, for example, to put Mr. Wannemacher in, had we handled 

the program correctly. 

We do have inbound programs for the customers to reach us. We 

have outbound letters. We have online contact, ways for the customer to get hold of us. And we are always glad to work with the 

customer. 

Senator SUNUNU. But the existence of a counseling program is 

not new for you? 

Mr. SREDNICKI. No, sir, and we have always supported the accredited counseling programs in the country. 

Senator SUNUNU. Mr. Hammonds, how many of your cards 

issued by your company are delinquent? 

Mr. HAMMONDS. Well, about 5 percent of the balances are delinquent. The average delinquent customer has a higher balance than 

the average customer. So about 2 percent of our customers are delinquent at any given time. 

Senator SUNUNU. So 2 percent of customers, 5 percent of balances? 

Mr. HAMMONDS. That is correct. 

Senator SUNUNU. Does that reflect industry norms? 

Mr. HAMMONDS. You know, I do not know, Senator. 

Senator SUNUNU. Why don’t we ask Mr. Srednicki. 

Mr. SREDNICKI. About 3 percent of our customers would be more 

than 30 days delinquent, and I believe that is below the industry 

norm. 

Senator SUNUNU. Mr. Atal. 

Mr. ATAL. Senator, we provide that information in our periodic 

financial reports. About 2 percent of our customers are over 90 

days delinquent approximately at any particular point in time. I 

think it is relatively consistent with industry norms. 

Senator SUNUNU. Let us talk briefly—the last question, Mr. 

Chairman—about these college students. Because I do not know 

whether to be alarmed now that my children are approaching college age or whether to see this as an opportunity. 

Are college students’ delinquency rates higher than the 2 percent 

that you say is typical for your company? 

Mr. ATAL. It is very similar, Senator. 

Senator SUNUNU. Any difference between their delinquency rates 

and the ones you just quoted, Mr. Srednicki? 

Mr. SREDNICKI. I think it is basically the same, Senator. And I 

would point out that the average student goes to college with some 

credit experience. The important thing for us is to make sure when 

a college student is solicited and he or she applies, is that they get 

educational information that tells them how to responsibly use 

their card, do not go over the credit limit, and pay their bills on 

time. 

Senator SUNUNU. Mr. Hammonds. 

52

Mr. HAMMONDS. They have slightly higher delinquency but about 

the same loss rate as the rest of our customer base. 

Senator SUNUNU. Thank you, very much. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Sununu. Senator 

Carper. 

Senator CARPER. Thanks, Mr. Chairman, for letting me go out of 

order here. 

I have county officials from all over Delaware, all three counties, 

are waiting for me to treat them to lunch so I am not going to 

keeping them waiting too long. I appreciate you letting me go out 

of order and just take a minute, if I could. 

I am going to submit a couple of questions for the record, if I 

may, Mr. Chairman. 

I want to just state one question. I will not ask you to answer 

it here but I will ask you to answer it for the record. 

I think you have all stated that your banks could improve the 

disclosure of your products and features of your products. I would 

just ask for the record, why don’t you just go ahead and do that? 

And why do you have to wait for the Federal Reserve? That is one 

I will ask you to answer for the record. 

Again, it goes back to the thought that if customers are well informed, they will make a decision and let those market forces and 

competitive forces work. 

The other thing I would say to our Chairman and to my colleagues, these banks are profitable and sometimes extraordinarily 

profitable in these operations. It has not been mentioned today but 

they are also extraordinarily generous. 

MBNA was one of the banks that Mr. Hammonds helped to start 

in our State. They are legendary in Delaware for their generosity. 

The support that J.P. Morgan Chase and Citibank provided, and 

I suspect in the other States that are represented here, whether it 

is in the education of our students, adopting schools, providing 

mentors in our schools, supporting our affordable housing efforts, 

just all kinds of activities. 

We are grateful for that. 

Last, I would just say in my Clean Air Subcommittee we focused 

on climate change and global warning and trying to figure out how 

we can reduce the threat of global warming without screwing up 

our economy and costing consumers an arm and a leg. 

I just learned that Bank of America has announced a $20 billion 

environmental initiative to support the efforts of a lot of businesses, a lot of people in this country and around the world. And 

we applaud you for that initiative, especially, and thank you for 

joining us today. 

Thank you, Mr. Chairman. 

Senator LEVIN. I think all three of your banks have a practice 

that requires that the payment by a consumer on a credit card account be applied first to the balance, which, as a matter of fact, has 

the lowest interest rate. Is that correct? Mr. Hammonds. 

Mr. HAMMONDS. Yes, sir. 

Mr. SREDNICKI. Yes, sir. 

Mr. ATAL. Yes, sir. 

53

Senator LEVIN. Why should you be in a position to decide which 

account a payment is made on? Why should that be exclusively 

your unilateral decision? 

In other words, instead of applying a payment to the account 

that has the highest rate of interest, you apply it to the account 

that has the lowest rate of interest. Why shouldn’t the customer 

have a voice in that? Mr. Hammonds. 

Mr. HAMMONDS. Senator, that practice actually started when we 

started offering zero percentage promotional rates, which I think is 

much like a retail store offering a sale to a customer. We know our 

customers like the zero rate. We know that they take advantage of 

it and that they save money as a result. 

However, we could not extend that zero rate without taking the 

payments to that balance first. If, for example, we extended a zero 

rate and then you paid first the other highest rate loans, you would 

never pay off the zero. 

Senator LEVIN. But the rate of interest charged on purchases is 

a higher rate—excuse me, a lower rate than the interest that is 

charged on money that is borrowed; is that correct? 

Mr. HAMMONDS. That is correct. 

Senator LEVIN. Why then, when somebody sends you a payment 

and they have two types of loans in effect from you, why should 

it be your unilateral decision to apply that against the lower interest rate of interest instead of the higher? I am not talking zero rate 

of interest here. 

Mr. HAMMONDS. That is the practice. 

Senator LEVIN. I know, but why is that a fair practice? Why 

shouldn’t we just say apply it to the rate of interest which is the 

higher rate of interest instead of the lower rate of interest? 

Mr. HAMMONDS. It is clearly disclosed at the time we give that 

loan to the customer, Mr. Chairman. So the customer knows up 

front how we are going to apply their payments. That is why I 

think it is fair. 

Senator LEVIN. Do you have anything to add to that, Mr. 

Srednicki? 

Mr. SREDNICKI. Senator, I think that the zero rates or very low 

interest rates——

Senator LEVIN. Not the zero rates. We are talking about the regular rates on purchases compared to the rates that are charged on 

money that is borrowed, the advances: Those two rates. One of 

them is 15 percent, and one of them is whatever the other percent 

is. Why should it be applied, when I send you a check and I have 

two open lines with you, one is for my purchases which is a 12 percent account, let us say, and one is for my advances where you 

have advanced me money. 

Why should I not be able to say I want to apply that to that account, which has got the higher rate of interest? 

Mr. SREDNICKI. The payment hierarchy, as we call it, is created 

so that we can give better rates to customers on either transactions 

that they buy on the card or in loans that we extend the customers 

to pay off other credit cards or other bills. It is a great consumer 

benefit. 

And if you make the right kind of disclosure and if you inform 

customers at point that they are giving you the direction to send 

54

a payment out to another issuer, to another retailer, or to a home 

furnishing store, it is a great consumer benefit. And we do believe 

our customers understand that pretty clearly and take advantage 

of it a lot. 

Senator LEVIN. I would ask that each of you go back to your companies and take a look at this trailing interest issue because, to 

me, patently—it is absurd, frankly, that I would get a bill February 

1 that says this is the total amount that I owe. And if I pay it by 

February 15, I think I would have a right to believe that it is, if 

I do not make any other purchases. 

And the idea that then I get a bill on March 1, with no further 

purchases, for what is called trailing interest, it is 38 cents in our 

example here, which is obviously a small amount in that particular 

example. 

But the point is not small. The point is there are probably hundreds of millions of dollars involved here, when you add up all of 

the small nickel and dime changes which are added like that. 

I would ask each of you to go back. I do not think you are familiar with this issue, perhaps. At least, Mr. Hammonds, you indicated you were not. Mr. Srednicki, I do not think I asked you or 

Mr. Atal. 

But whether you are familiar with it or not, it seems to me it 

is patently unfair. I would ask you to go back to your banks and 

see if you can get that thing dropped. 

I think, Senator McCaskill, technically you would be next because he went out of order. Is that all right? 

Senator COLEMAN. Actually, I have just two questions and I have 

a 12:30 meeting with——

Senator LEVIN. I am looking by my Ranking Member and Senator McCaskill and figuring out what the rules of the gavel are. I 

want to follow these disclosure rules very carefully. 

Senator MCCASKILL. I would yield to Senator Coleman, no matter what the rule is. 

Senator LEVIN. Thank you. That solves my problem. Senator 

Coleman. 

Senator COLEMAN. Thank you. 

Just two lines. First, a comment about the college kids. I have 

a son in college who has a credit card. Actually, he has been really 

good. I think he has an understanding of his obligation. He is really proud. He makes his payments. He is already negotiating lower 

interest rates. I think it is actually a good deal. 

My concern, though, would be, apparently we put a lot of time 

into educating college kids. The average consumer does not have a 

college education. I would hope you would go back over what you 

are doing with average consumers and put the time and money 

into educating them as well. It would be very helpful and I would 

urge you to look at that. 

I do have to say—and I hope I am pronouncing it correctly—is 

it Mr. Atal? 

Mr. ATAL. That is right, Senator. 

Senator COLEMAN. I think Citigroup has it right that terms of 

the deal should not change, customers should not be repriced unexpectedly. 

55

I would ask Chase and Bank of America, are you considering 

doing the same thing? If not, why not? 

Mr. SREDNICKI. Senator, we are always evaluating things that we 

can do to be more competitive. This is a very competitive industry. 

But I would point out that we could reprice many more customers than we do. But we use individualized credit decisions in 

order to handle our customers. So that if your son were one of our 

customers and he was delinquent on our card, only one in 10 customers like that would be repriced by us. We take into account the 

credit performance of the individual customer and his experience. 

And every student that we get with limited credit experience, we 

do give credit education to. 

Senator COLEMAN. Mr. Hammonds. 

Mr. HAMMONDS. Senator, I would echo what Mr. Srednicki said 

about this being a very competitive market. And so with this new 

announcement by Citi, we certainly will look at that. But we will 

look at it compared to all of the other things we do in pricing compared to Citi. We always take those things into consideration as 

well. So, absolutely. 

Senator COLEMAN. I appreciate it. 

Thank you, Mr. Chairman. And thank you, Senator McCaskill. 

Senator LEVIN. Thank you. Senator McCaskill. 

Senator MCCASKILL. First, I want to thank all three of you for 

being here, sincerely. I think it is helpful. And to whatever extent 

my personal frustrations have spilled over today, I apologize to the 

three of you. 

It is interesting because you all talk about how competitive your 

businesses is. And it is interesting to me, because I really believe 

there is a lot of American consumers that are very frustrated with 

your businesses and frustrated with what they do not understand 

and what they do not know. 

It seems to me there is such a marketing opportunity there. And 

I think Citi has happened upon something that I bet will help, 

something that says to the consumer we are not going to change 

the rules on you. We are going to make sure you understand the 

fine print. 

I think you all—and I know you all do focus groups all the time. 

But I would be really interested, if any of you did a focus group, 

how someone would feel if you advertised we are going to send you 

a disclosure that you understand. It may not be something that 

looks like anybody else’s disclosure. But you are going to understand it. You are going to understand what happens if you do not 

pay the bill by the date it says. You understand what happens if 

you go over your limit. We are going to let you charge it in the 

store, because I think a lot of people believe that if they are going 

to charge something that goes over their limit, the machine is 

going to stop it, the machine is not going to let it go through. But 

you do, because that, I think, probably embraces some other monies that may come into your companies. 

I just think that in some ways I think sometimes you get so 

caught up in competing in the business like you have always competed that you do not maybe think that there might be an opportunity out there to really make it simple and be really upfront 

about everything that you are doing and what it means. And I 

56

think you might be surprised how many people would flock to your 

companies. 

Let me ask the three of you, on your promotions, what is the current promotion you are running? Is it 1.9 percent or is it zero percent? What are the current promotions you are running at the front 

end? Is there one? 

Mr. ATAL. At any one time we have many promotions running to 

different sets of customers. 

Senator MCCASKILL. Could you give any kind of average as to 

what the promotional interest rate is that you may be—it seems on 

the envelopes I am seeing all the time is 1.9 percent. Is my mother 

just in a certain set that she is getting 1.9 percent? or is that a 

common promotional right now? 

Mr. SREDNICKI. Senator, I would say that there are literally hundreds of different types of promotions out there. Some of them have 

no promotional rates but we are selling, for example, an airline 

miles program or a rewards program for a hotel chain, etc. 

And then there are some programs that go out with a zero APR 

for a length of time or a 1.9 percent and then a go to rate that is 

sometimes fixed, sometimes variable. 

With our company, we solicit the most credit worthy customers 

and credit experienced customers so the rates are quite low. 

Senator MCCASKILL. The interesting thing about your promotions, I got the analogy you gave, that it is like a retail store 

offering a promotion. Except when they give you a cheap price on 

hamburger, it is because they think when you are there buying the 

hamburger, you might buy a steak. With your companies, it is completely a different kind of promotion because once they are in, they 

are in. Once you get them that card and they have the ability to 

use that card, then I am assuming that the goal of your promotion 

is to get them in the door and then to have them as a long-term 

loan customer. 

Mr. SREDNICKI. Absolutely. 

Senator MCCASKILL. That is why I think that the disclosures are 

so important. This is not about buying a steak. This is about them 

signing up long-term for a financial obligation. It is so important 

they understand. 

Late penalties, can you all give me what your late penalty is? 

What is your late penalty, Mr. Hammonds? 

Mr. HAMMONDS. I believe we assess it one day after the due date 

and it is tiered up from $15 to $39. 

Senator MCCASKILL. Mr. Srednicki. 

Mr. SREDNICKI. We generally assess it one day after the due date 

and it is tiered based on balance and it goes up to $39. 

Senator MCCASKILL. Mr. Atal. 

Mr. ATAL. At the high end we have a $39 late fee rate that is 

applied after the due date. 

Senator MCCASKILL. Let me just make an observation here. I 

know that there is a lot of times, throwing up the worry of antitrust is something that I think is used selectively sometimes. And 

I might point out that all three of you have the identical late fee. 

Is that because it is set by law or you just have followed each 

other, when one goes up the other two go up? 

57

Mr. HAMMONDS. I think, Senator, it comes back to this being a 

very competitive business and you have to be aware of what your 

competitors are doing. And that is probably the result of that competitions. 

Senator MCCASKILL. Finally, the last question I have, and I do 

not mean to pick on Chase. I tried to read through all of your disclosures that we have in our book, Bank of America and Chase and 

Citigroup. 

I know that lost and stolen credit cards are the liability of your 

companies, as opposed to the cardholders; correct? 

Mr. SREDNICKI. Yes. 

Senator MCCASKILL. I do not think most cardholders know that. 

Now I am not sure that you should tell them because I think everybody should be careful with their cards and keep track of them. 

But I think a lot of consumers assume that if they lose their card 

or it gets stolen, somehow they are going to be responsible for the 

charges. 

I am curious, Mr. Srednicki, why, when you look at your billing 

statement disclosures, the very first one is lost or stolen, which is 

the only one that really would impose a liability on your company. 

That is the first disclosure on your disclosure statement. And it is 

the only one that you tell the consumer how to get a live adviser. 

All the other disclosures on this sheet, if your customer wants to 

get a hold of someone, you actually spell out you can reach an adviser by pressing zero after you enter your account number. 

In other words, you are making it, in the very first paragraph, 

very simple for a consumer to let you know when you are going to 

have a liability. But when you get down here to your billing rights 

or any of that, there is not that information about you can get an 

adviser. 

Do any of you put in your disclosures anywhere how you can get 

a live adviser, other than in the section that has to do with liability 

your companies will, in fact, have? 

Mr. SREDNICKI. Ours is on every statement. We tell the customer 

on every statement, it is on the back of their card, how they can 

get a hold of us for virtually any type of a problem. 

Senator MCCASKILL. Do you explain you can hit zero for an adviser after you enter your account number? 

Mr. SREDNICKI. I do not know the answer to that. 

Senator MCCASKILL. I would be interested in that, because that 

is part of the battle here, is getting a hold of a live person who you 

can talk to and they can explain things to you. I just thought it 

was fascinating that the only place I found, in any of this, that you 

could get a hold—whether the consumer is told how you can get a 

hold of a live adviser, is in the area where you are going to have 

the financial liability instead of the customer. 

Mr. SREDNICKI. I never thought about it that way but when any 

one of our customers wants to call us, we have live advisors available on the phone 24 hours, 7 days a week. I think both of my competitors do, too. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator McCaskill. 

There has been some discussion here today about the profitability of the credit card industry, and I pointed out in my opening 

58

statement that I believe it is the most profitable part of the commercial banking world. It is very profitable for many years consistently. Obviously, there is some risk involved. You talk about this 

is an unsecured loan. 

But you folks send out 8 billion pieces of mail a year—not the 

three of you, and not your companies, but the entire industry, 8 billion pieces of mail. I do not know if there is any other industry 

which comes close. I doubt it. 

There is obviously a significant profit in this industry or else you 

would not be soliciting so often, so repeatedly. I do not know how 

many pieces of mail that averages per household. My wife, I think, 

would say that she thinks she gets most of the 8 billion solicitations, just over and over and over again. 

But there are already 640 million credit cards out there. I think 

it attests both to the competitiveness in the industry, which you focused on, but it also attests to the profitability of the credit card 

industry. 60 to 70 percent of the people who have credit cards, I 

think by your statistics here today, do not pay in full on time so 

that they run balances. For those folks—I think that is about an 

average figure. 

For those folks, they are the ones that get hit with the over-thelimit fees, the late fees, the high interest rates after they have paid 

their zero percent for whatever number of months that is, after 

they sign on. These are the folks that frequently get into real financial trouble, as Mr. Wannemacher did. 

But I think we have to, first of all, welcome the reforms that you 

folks make when the spotlight is on you. Those are welcome. 

And it is necessary that we keep the spotlight on you, obviously. 

That is the role of oversight. That is the role of Congress. 

But we cannot have hearings here every day. We cannot get 

every Mr. Wannemacher out there in front of us every day to have 

his debt forgiven. I wish we could, but we cannot. 

We have done some good just with this process you have announced in the last couple of days, in which Chase has changed the 

terms of these multiple over-the-limit fees, and that is welcome. 

As Senator Carper points out, however, there are I do not know 

how many thousands of companies out there that are not going to 

put limits on how many over-the-limit fees they charge. Mr. 

Wannemacher was hit 47 times for a $200 over-the-limit fee. He 

was charged $1,500 in fees for a $200 over-the-limit amount. 

I think your three companies are now intending, with Chase’s 

addition today, to stop that. But all those other companies that 

Senator Carper referred to are out there. And the question is how 

do we get them to stop that abuse? We cannot have a hearing with 

a thousand companies here, put the spotlight on them. And so you 

have to have some regulation and you have to have legislation. 

That is the line that we have to figure out where to stop and where 

to cross. 

Some of these practices are not fair. We have talked about the 

trailing interest. We have talked about these multiple over-limit 

fees on consumers. We have talked about piling penalty interest on 

top of penalty fees because people, as Mr. Wannemacher says, are 

charged interest when those penalty fees are added to the amount 

that is owing. 

59

I believe it is wrong for people to pay interest on debt which they 

pay on time. I think most people do not believe it. In fact, it is 

counterintuitive when I ask colleagues of mine, are you aware of 

the fact that if you pay a big chunk of your credit card bill on time 

that you are still going to be charged interest on the amount that 

you paid on time next month? And they all look at me like are you 

kidding? 

So maybe it is in the fine print somewhere in the disclosure, but 

I think it is wrong. 

I do not think we ought to charge consumers a fee to pay their 

bills. And I did not have a chance to ask you all about this but apparently it is the practice that if you pay your bill by phone that 

you are going to be charged a fee even if that bill is paid on time. 

That does not strike me as being fair. If you pay by computer there 

is no fee. If you pay by mail, someone has got to open an envelope, 

there is no fee. But if you place a call to the company and transfer 

money from another account or a bank to pay that credit card bill, 

you are charged a fee. And that is troubling, as well. 

We are going to keep the spotlight on. This oversight hearing has 

been very valuable to us in terms of the road that we are going to 

walk. Hopefully not needing too much legislation. But I think at 

least for all those other companies that are not put right under the 

microscope as you folks have been today, that those companies 

have got to be reined in as well. And I do not know how to do it, 

except through regulation or through legislation or through the industry adopting some kind of a code of practices which everybody 

signs up to. 

But there clearly are excesses out there. There are abuses out 

there. We appreciate not only the steps that you have taken, in a 

number of instances, to correct some of those abuses and very honestly and openly saying, in a number of cases, it is because of these 

oversight hearings and the Banking Committee’s hearings. But also 

the fact that you have been very cooperative with the Subcommittee. 

You have always provided us the information which we have 

sought. You have been helpful in that regard. And we appreciate 

that. And we will keep the spotlight on, the one that you faced 

today. 

We appreciate your being here. 

Thank you so much and we will stand adjourned. 

[Whereupon, at 12:50 p.m., the Subcommittee was adjourned.] 

(61)

A P P E N D I X 

PREPARED STATEMENT OF SENATOR COLLINS 

Mr. Chairman, I commend and share your long-standing interest in consumer protection and fair play. 

Within the lifetimes of many of us in this room, credit cards have grown from a 

novelty for the affluent, to an essential element of daily life for many Americans. 

A recent Government Accountability Office (GAO) report cited evidence that Americans hold nearly 700 million credit cards, use them more than 2 billion times a 

month, and charge nearly 2 trillion dollars a year. 

The GAO report noted that nearly half of cardholders pay off their balances 

month to month, and that competition among card issuers has brought interest 

rates below 20 percent for four-fifths of card users. For most people, credit cards 

are a clear boon. 

Unfortunately, as the GAO report, our own observations, and our constituent mail 

can testify, many people find themselves shocked—and their budgets strained—by 

fees, penalties, or rate changes that were not explained well, or that defy our basic 

sense of fair dealing. 

The GAO found, for example, that some credit-card disclosure text is written at 

third-year college level, even though about half of the population reads at eighthgrade level or below. Complicated explanations in tiny type may explain why over 

half of cardholders surveyed said they didn’t read disclosures closely—or at all. 

Informed consumers are key to reaping the advantages of competition and choice 

that help our people and our nation to prosper. Making sure that credit-card users 

can understand their choices among differing rate and fee structures will help them 

avoid unsuitable choices and will sharpen competition among card issuers. 

Improved disclosure—which ideally includes simpler language and clearer displays—will also call attention to practices like double-cycle billing, through which 

a card holder paying off even a large part of a balance during the grace period gets 

charged interest on the entire amount in the next bill. 

Mr. Chairman, I look forward to studying the views of the Subcommittee’s witnesses today. I am sure that card issuers and users can help us identify improvements in practices and disclosures that will make credit cards an even more useful 

and beneficial part of our national commerce. 

Thank you.

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