I’ve always regarded credit cards the same way I do red wine. Moderate use has been shown to be beneficial – wine with it antioxidant properties, and credit cards with reward programs. Excessive use of each can bring you a world of pain. The problem for many people is that get a little too addicted and find that themselves closer to the excessive.
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