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New Regulation on Credit Card Unfair Practices Approved

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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):

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15 Responses to “New Regulation on Credit Card Unfair Practices Approved”

  1. I support this change.

    I believe this will help people who are struggling financially to have a bit of a leeaway. After all, the economy isn’t too forgiving.

  2. DebtKid says:

    Nice summary of the changes Jim.

    I had not heard of double billing before, that’s just criminal. It’s too bad these new regs weren’t passed a few years ago. It seems like many pundits believe consumer credit is the next big shoe to drop, and I agree.

    • jim says:

      When the times are good, we call for deregulation so the good times can keep coming. When the times get bad, we try to assign blame and wonder why we didn’t regulate. These rules didn’t happen because people were happy with easy credit, buying lots of stuff, and living the high life… now that the reckoning has come, people demand justice. :)

      I have a bunch of friends (mid-20′s) who own BMWs and nice houses… that stuff only happens because credit is cheap! But, they make all their payments and, to my knowledge, are at no risk in defaulting, so it’s not like they were irresponsible.

      • Joy says:

        You sound like the typical credit company supporter. People do not only get into trouble because they are “irresponsible.” Banks are the second most profitable industry in the world, ahead of insurance companies (22nd) and oil companies (6th or 10th, I forget). This is NOT an accident or because banks are so wonderful. They use unfair practices to gouge consumers. They charge interest rates which are unfair to begin with, increase them for no reason or reasons they CREATE, and charge “default” rates which are higher than state usury rates (usury is an illegal, “loan shark” rate, determined by state law). You don’t need to be “irresponsible” to see the very negative effects of their practices, you only need to be strapped and struggling, which you obviously are not. Don’t judge what you don’t understand. How do banks “create” conditions of “default?” First of all, they consider “default” to be going over your limit or being late on a payment once or twice. That is all it takes to be charged $39 fee and have your interest rate raised to almost 30%. Then, they set you up to do just that. How? They change your due date and billing cycle days. They let you go over your credit limit, not just by adding finance charges, which change like the wind, but by simply allowing a charge to go through when it should be declined. They will tell you that this is according to a customer survey, because customers don’t like to be “embarassed” by being declined. So you have to go around knowing exactly what your balance is at all times, exactly what your finance charges will be, for every card you have. This is impossible. Some of them will not let you “opt out” of going over your limit. One card I have even tells you you have more credit than you do AND lets you go over. They “round up” when tellng you your available credit. I consider this a species of fraud. They have lots of “tricks” and its time we stopped defending them AND bailing them out. I can not believe the government is bailing the banks out right now. You who are concerned about everyone’s interest rates rising….how about demanding that the banks’ profits be limited instead?

        • jim says:

          I’m not saying everyone who has problems with credit is irresponsible, but there are plenty who were irresponsible.

          “First of all, they consider “default” to be going over your limit or being late on a payment once or twice. ” – That’s irresponsible. The limit is clearly stated and the due date is clearly stated on your bill. How is this responsible behavior?

          “So you have to go around knowing exactly what your balance is at all times, exactly what your finance charges will be, for every card you have. This is impossible.” – I don’t believe this is impossible if you are responsible, if you charge everything without keeping track, that may be all fine and good but it’s not responsible behavior. Responsible means you know what your balance is, you know what your limit is, and you stay under it.

          Yes, credit card companies do use a lot of tricks, but the examples you use are of irresponsible behavior.

          I love my credit cards, they enable me to carry purchasing power in my wallet without having to carry the cash itself. Am I credit card company supporter? Yes. Do I support all their practices? No. But it’s like the government, I wholeheartedly support the United States of America and yet I disagree with plenty of the laws and practices.

  3. It didn’t really occur to me until this morning, but I’m not sure that these rules changes will do much for consumers. If they cannot afford to pay much more than the minimum toward the principal balances, then all that this will really accomplish is limit the compounding of the interest charges on the existing balances.

    The prevalent school of thought is not to charge anything that you cannot afford to pay when the cycle ends. That being said I’m not exactly sure what an additional few grace period days will do for people. Every so often I’m sure a pay day will fall into that extended period and help a little, but not so much that it will help those who are already far behind on their payments.

    As far as spreading the payment in excess of minimums, and I’ve eluded to this on my own blog–refer to Try Taking A Different Approach to Paying Down Debt for a full explanation, there are times when that won’t really be of significant help. Many people got in over their heads at lower rates before any increases so most of their interest charges will be from those charges. The best solution would be to allow consumers to choose which charges their payments in excess of minimums are applied to (highly unlikely, I know)

    I guess this act is more likely than not intended to be a forward-looking bill rather than anything to remedy all of the consumer debt that exists today (obviously the start date for the rules changes is a pretty good indication of that!)

  4. All of this sounds good to me. It’s about time somebody made credit card companies clean up their practices.

    Shame on them for trying to take advantage of people anyway. It may not do much for people who are already over their heads, but it rectifies a few ‘unfair’ things for the rest of us.

  5. Eric N. says:

    It’s a step; let’s keep it going.

  6. saladdin says:

    Doesn’t solve the real problem of people charging Happy Meals on their cc’s and carrying the balance month to month.

    I’m with erik. This really does nothing. It just saves people who already in trouble a few days and a few cents. Doesn’t solve the reason.

    saladdin

  7. Lou says:

    Well, in my case last April I opened a card I never activated – impulse. Then i got sick. The card company charged a $50 annual fee & has compounded it. Now that i’m back on my feet – literally out of bed – and focused & trying to clean up my backlog, I see that the bill, with interest, on a card that was never activated has grown to $200 – AND they are threatening me with collection efforts. Two other companies have cancelled my (seldom used) cards

    So i like the can’t-bill-an-unactivated card idea.. Don’t know yet the effect on my credit overall, but since i use debit cards nearly all the time, i don’t care.

  8. Scott says:

    The regulation has me torn. On one hand, I’m glad the governing bodies are taking action to prevent predatory and deceptive practices.
    But on the other hand, I believe that this regulation will cost more for those who handle their credit wisely. The days of generous promotional offers are fading. And interest rates across the board will likely rise to make up for the revenue losses resulting from the regulation.

    • jim says:

      I agree with you a little bit but only on the interest rate hike reasons, I think some of the other things like universal default and double cycle billing were abusive, especially double cycle billing. I think that if you abuse the system, you get what you deserve in the end.

  9. Glenn Lasher says:

    I have a small concern over the provision that allocates payments to what part of the debt by interest rate. Specifically, I am concerned about 0% financing deals, where the interest is not skipped, but deferred.

    In such cases, I want my payments to go to these first, so as to eliminate as much of that portion of the debt as possible before it matures and the deferred interest becomes part of the balance. It seems that this one rule will cause my payment instead to go to the rest of the balance, and that is not desirable.

  10. Brian says:

    My American Express Platinum charge card has a 15 day grace period still. Not sure your “21 day grace period” rule is accurate.

  11. Hank says:

    My credit card has gone up from 5% to 15.24% I,m just trying to get them to help me out in some way since I am a loyal customer


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