News tonight includes a big story from the Federal Reserve and other regulators regarding deceptive trade practices in the credit card industry. It's interesting to me that this was a Friday night story, which is usually when the government comes out with stuff they don't want anyone to really notice.
The proposed rules would be the biggest clampdown on the industry in decades, aiming at protecting people from credit card companies that arbitrarily raise interest rates or don't give borrowers adequate time to pay their bills.
The proposals would also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with different rates. The Fed board voted Friday to approve the recommendations.
In the long run, this is good news for folks with credit card debt. Note, though, that these rules are not slated to go into effect until the end of the year and are technically only in the "proposed" stage.
Among the new rules would be prohibitions on:
-Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay;
-Unfairly allocating payments among balances with different interest rates;
-Retroactively raising interest rates on pre-existing balances;
-Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account;
-Unfairly computing balances in a computing tactic known as double-cycle billing;
-Unfairly adding security deposits and fees for issuing credit or making credit available;
-Making deceptive offers of credit.
Currently, if you get a zero interest balance transfer but already have a balance on the card, any payments you send are allocated to the zero percent balance while the current balance keeps accruing as usual. Intuitively, you'd think it would be the other way around. These rules would stop that.
Double cycle billing is something I've explained before and it gives me a headache, so I'm glad to see it go.
Over limit fees when a rental car place puts a $500 "hold" on your card that will never actually charge an amount that high - gone.
Raising rates on current balances arbitrarily - gone.
Extra fees and charges for issuing credit, which is something that usually targets folks with bad credit and is a way to effectively raise rates tremendously by increasing the balance that has interest charged against it - gone.
Deceptive offers of credit, which kind of encompasses all of these things - gone.
Until now, the credit card industry has worked on the "disclosure" rule. In essence, if it's in the fine print in legalese and you go ahead and use the card, too bad for you. These rules will hopefully bring about much more transparency.
Now for the bad news.
This is conjecture on my part, but if I'm a bank and I know that these rules are going to likely be put into place by the end of the year, I'm going to do my rate raising or my non-renewing of accounts (thereby demanding repayment within a certain amount of time) before that happens. If you currently carry credit card debt, don't be surprised if you get a notice in the next few months that your rates are rising or (if your card expires in 2008) your account will not be renewed.
What can you do? I'd say keep an eye out for your junk mail. Look for low rate balance transfer offers. Balance transfers are at least bound by the time that they agree to in the offer unless you make a late payment, in which case all bets are off and you'll probably go to a much higher rate. Pay down what you can on any cards that expire in 2008.
Maybe I'm wrong, maybe they'll think that shenanigans like that will be scrutinized ahead of these changes. Unfortunately, given the flippant tone of the Citicard rep who told me that my rate increase was purely a "business decision," it seems like the companies have taken a pretty combative stance and it would kind of surprise me to see them all of a sudden decide to go the altruistic route.
By the way, the credit card industry is saying that these new regulations are just going to raise rates for everyone. Well - good. The industry has been completely flouting the basic rule of lending - risk vs reward - by offering overextended consumers low interest debt for years now, and it's coming home to roost. And in reality, that threat is more for the government than the citizens. In effect they're saying that without low interest debt, consumer spending is going to slow down. While I know that might hurt in the short term, it's ultimately a good thing for all of us.
Interesting times.
