This week, the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration, after receiving a bazillion comments (really 65k+) on Regulation AA (Unfair or Deception Acts or Practices, by financial institutions in connection with consumer credit card accounts and overdraft services for deposit accounts), approved changes that make credit cards more friendly to consumers. While it will be until July 1st, 2010 before the regulations take effect, here’s what will change.
Double-cycle billing is no longer allowed. Double cycle billing is the practice of taking the average of your balances for the last two statements and charging you interest on that number. If you had $1,000 on your last statement and $0 on the current one, you’d be charged interest on $500 even though your current statement had a zero balance. This is probably the most bullshit way to calculate interest I’ve ever heard of and it’s no surprise this was disallowed.
Interest rates cannot be raised until a payment is over 30 days late. I always understood credit card rates to be variable, meaning they can change at anytime, so this seems like an unfair rule. However, when you consider how some credit card companies took advantage of people and increased rates arbitrarily, I can see why this was passed to protect consumers. This effectively kills “universal default,” which was the practice of raising your credit card interest rate because of a missed payment on some other account. Miss a rent payment? The credit cards would increase your rates based on “universal default.”
Consumers must be given 45 days notice, instead of the typical 15 or 30, before a higher penalty rate is applied. Right now, credit card companies can increase your rate for any reason and most give you 15 or 30 days notice (to be fair, most of mine give 30 days). The new regulations increase that to 45 days and this is so consumers can shop around and get a new, lower rate card. I don’t know if a month and a half is required but I always felt 30 days was fair enough and 15 was way too short (letters take several days to deliver and then you’re left in a rush to apply, get approved, and transfer).
Consumers must have at least 21 days to make a payment before late fees are charged. All of my credit cards have always had a 21 day grace period (I think anyway!), but I imagine some cards may have dropped it to 15 or this rule wouldn’t exist.
Credit card companies must apply payments beyond the minimum to the highest interest portion of your balance or divide it evenly amongst all balances. As it is now, consumer payments are applied to the lowest interest rate portion of your balance, thus maximizing profits. This is how credit cards could offer a 0% Balance Transfer for Life. They would transfer the the balance to 0% and require you to make two purchases a month. Those purchases would be charged a market rate of interest (like 20%) and your payments went towards your 0% balance. Now, credit cards will likely divide your payments between the different interest rated portions of your balance. I think they should’ve gone farther and made it so that companies would be forced to apply payments to the highest interest portion first, rather than have a “choice.”
New card are reported to credit bureaus after first use or activation. I don’t think this rule solved any major problems but it does highlight a scenario that credit card companies could limit. Let’s say you apply for a card and you are approved, but the credit limit is too small. You might just want to cancel if they can’t increase it and so this rule would make it so that the card is never reported. The impact of this change is pretty minor I think, especially compared to raising interest rates and double-cycle billing.
There are a few other additional regulations but I think the ones I outlined above cover the bulk of the “headline” rules. The banking industry argues that these regulations could mean that interest rates across the board will go up, something that I think makes sense but is acceptable. If you can’t raise someone’s rate, then you have to raise everyone’s rate to account for the percentage that will miss payments and defaults. However, credit card companies put themselves in this position with ridiculous practices like double cycle billing and 15 day notices on rate hikes so they can only blame themselves.
If you’re curious how your credit card statements might change given these now regulations, the Ohio Treasurer of State, Richard Cordray, and his team put together this little widget to help explain the changes you’ll see on your credit card statements (after the jump):