While I’ve always been able to stay on the beneficial side of credit cards, I’m probably in the minority. Credit cards statistically tip the scales in their favor to make a buck at every opportunity. I can’t blame them for that – they wouldn’t be very good business people otherwise. They also have to make up for freeloaders like myself. Still credit card companies over the years have gradually been treating consumers worse and worse. Finally, it reached a point where the government said the equivalent of “Enough, this simply isn’t healthy and we are going to step in and make things more fair.” (Baseball take note: it’s not too late to start taking similar actions with the Yankees).
How have credit card companies been making things “unfair” for consumers? (Note: We could go into the topic of what’s “unfair”, since everyone has option to take or leave credit cards as they see fit, but that’s another post entirely.)
- Universal Default – In the past, if you fell behind on one debt a credit card could raise your rate – even if you are paying that credit card on time. Credit card companies would say that your credit risk profile changed and they need to adjust rates accordingly. Consumers would argue that if a payment for another bill got lost in the mail they shouldn’t have to suffer penalties from all their financial institutions.
- Double Cycle Billing – If you have a balance credit card companies would choose the average daily balance over the last two months and charge you interest on that. On time I wrote my credit card a check for what I thought was the full payment, but mistakenly forgot write in the change in the long section. Even though I had it in the numeric section the check was cashed for it without the few pennies. The credit card charged me over $30 dollars in two months of interest and fees because of a mental lapse. (I was lucky and customer service fixed the issue). They should charge you on the portion that you don’t pay, but that never happens.
- Short Billing Cycles – If your credit cards are like mine your billing cycle is around 21 days. By the time my bill arrives in the mail I’m already down to 14 days or fewer. Considering that you have to give them 5 business days for checks to clear, that gives you about a week to act on the bill. That’s cutting it close if you are on a vacation when your bill arrives. Best solution: Pay your card online.
Credit Card Bill of Rights
Enter the Credit Card Bill of Rights. The Federal Reserve Board, the Office of Thrift Supervision, and the National Credit Union Administration have worked together to pass some new regulations that will take effect in July of 2010. What’s going to change? The following:
- Universal Default Is No More – Ding dong the witch is dead! Universal Default will be a thing of the past. If a credit card is going to change its interest rate it has to be due to some action in the account.
- Longer Billing Cycles – Finally I can take a vacation. Credit card companies must mail statements 25 days before the due date.
- No Double Cycle Billing – If you paid off your card last month, you won’t have to pay interest on it if you are late next month. Sounds pretty fair to me.
- Credit Cards Will Apply Payments Fairly – I didn’t even know this was an issue, but if you have two rates at different percentages, say a balance transfer and a cash advance, the credit card company can’t choose to move your payment to the lower interest one letting the high interest accumulate.
- More Notice of Interest Rate Changes – In the past, card companies could change your interest rate in as little as 15 days. That’s not a lot of time to react. Now you get a full 45 days.
- Interest Rates Won’t Raise Without Reason – Credit card companies would always say, “We can raise rates for any reason at any time.” Now they can’t – they have to have some kind of reason and notify the card holders with enough time to react (I’m guessing the aforementioned 45 days).
As someone who pays off their credit cards in full, these don’t impact me too much. It might help me in the rare occasion. I anticipate that these rules will hurt me instead. They stand to make credit card less profitable than before – which means they’ll be likely to scale back their rewards programs. My free ride may come to an end.
One thing that I don’t hear a lot about is that credit card companies have 18 months to comply with the regulation. That’s in stark contrast to the fewer than 18 days (15) that they gave consumers to react to their changing policies. What’s good for the goose, right?
(Note: For those of you in Canada, I have no idea how this may apply to a credit card like American Express for example).
Photo Credit: yksin
David Wynn says
I’m amazed that the news of Universal Default ending hasn’t been more widespread. That’s probably going to affect a lot of people in a very consumer-friendly way.
Haha just kidding, I think the cc industry brought this upon themselves. Universal default might be borderline shady but double cycle billing is absolute [bullpoop]… Too bad it took so long to get this done and it’ll be until July of 2010 before it’s enforced.
I really hated the way that they applied payments to lower interest rates first. I always had a card with a lower interest rate on balance transfers on it and knowing that I was paying the 3% portion off before the 12% portion really angered me. Come to think of it, that must have been the reason they offered me to transfer a balance to begin with!
Brett @ Personal Loan Portfolio says
Overall this is fantastic news for most consumers. I have heard horror stories of interest rates being raised on past purchases because of people purchasing retread tires to try to save money. This should put an end to that. I also have an acquaintance who fell into a vicious circle of CC companies raising rates that led to bankruptcy. It might have been prevented through a law like this.
This item sounds like a great idea: “Credit card can’t choose to move your payment to the lower interest one letting the high interest accumulate.” However, that is what zero interest (or super low interest) balance transfers/checks were all about. I used these smartly — to obtain free money. If I used one of those offers to make a large purchase, that CC went into the safe until that balance was paid off. However, this law may put an end to these offers because the ROI to the CC companies was based upon this principle that has now been outlawed. It was always written in the fine print (which was easy to find and understand IMO) that this is how these offers worked.
I don’t have much sympathy for the poor rich credit card companies. They should’ve treated their customers right from the start.
If my credit card company changed a policy, and did not bother to inform me I would probably never use their card again, and take my business elsewhere.
Brett @ Personal Loan Portfolio says
Penny, they always informed you if a policy changed. The problem was that it was buried in legal jargon. Although, even worse many nefarious tactics to rake in more of your money were usually already covered by preexisting policies or could “change without notice” and this were already covered.
“these don’t impact me too much”
Actually I think it will impact you – in a negative way. I think there’ll be fewer rewards, fewer cash backs, fewer 0% offers. It will also impact the value of your 401K at least if you have any of it in equity funds. Also negatively.
Personally, I don’t like that this bill passed. It protects irresponsible math-challenged people who carry balances and it will hurt those of us who’s always been responsible, who lived within our means, paid our balances in full every month, and saved money. Every index fund owns financial stocks. Lower profits for financial companies = lower stock value — you are going to lose money because of this bill as will all of the “savers”.
Yes, some practices like double cycle billing were bad. So? Easy way around it – don’t carry balances or don’t have a card if you are unable to keep your card in your wallet. As to universal default, I think it made a lot of sense. Not paying any bill on time anywhere means one is a risky customer. Higher risk = higher reward. This happens all the time with corporate credit: when a corporation’s financial situation gets worse, Finch reduces its credit rating. Then company’s bonds value goes down and consequently bond yields go up. The company needs to pay higher interest on new bonds. Why should it be any difference with individuals?
@kitty, I agree about this bill protecting the irresponsible. we’ve become a credit nation and we feel entitled to credit and we feel credit is a right. unfortunately, people over react during times of crisis.
many of these provisions don’t change anything really, because the major credit card companies already adhere to the provisions–that is, universal default, double cycle billing, grace period, and interest rate without reason. the only real change is the application of payments rather than to the lowest rate first. Every card i have received, it is very clear that the cc company applies payment to the lowest rate. i simply didn’t see this as a problem. what this is to me is that people who have probably benefited from a lower interest BT or promo rate are still charging on the same card. personally, if they did a promo or bt rate, they shouldn’t be continuing to charge on the card anyways.
fluffy words like “reasonable and “unfair” are used towards fees, because the Supreme Court has already ruled that cc companies can charge fees and interest rate limits according to the State of the company’s HQ. This doesn’t change how much the fee can be, presumably because of the supreme court ruling. so, basically, it limits cc companies to whatever the state law is, which they already are abiding by. those fees, therefore, will not change.
if people are angry at the credit card industry, they really need to look at themselves first. you don’t need a credit card. if you think you need a credit card, you definitely don’t need to carry a balance. if you don’t carry a balance, you have nothing to worry about. people want all their free credit still. Hello people, free and loose credit are the reasons why we are in the current economic situation. Get your personal finances under control and stop worrying about your credit entitlement.
Lazy Man says
I found this list of what credit card companies are complying with what parts. If it is to be believed no one follows the interest rate without reason.