Credit Card Rules Must Change
Posted on September 9, 2008
Filed Under Credit Card News, Credit Rating, Debt Consolidation, Education, Legal/Government, rates | 3 Comments
If you want an idea of how angry consumers are at credit card companies, get a load of the complaints e-mailed to the Federal Reserve about efforts to prohibit unfair practices by credit card companies. “I have been the victim of credit card companies who have subjectively raised my interest rates,” said Jon C. Kubic of Thornton, Colo. “I have never missed a payment or failed to pay at least my minimum payment.”
Ann Downey of Laguna Hills, Calif., is grateful for the Fed’s efforts to protect consumers.
“It seems that the last seven or so years that banks and credit card companies have had their way, like the floodgates opened, and consumers’ rights got washed away in the flood,” she said. “They almost help themselves to our money through any fee they can think up.”
The proposed rules would forbid banks from using the “two-cycle” billing method to calculate interest charges, require that consumers receive a reasonable amount of time to make their credit card payments, and prohibit the use of payment allocation methods that unfairly maximize interest charges.
With two-cycle billing, the average daily balance is calculated based on two billing cycles rather than one. Credit experts say that approach effectively wipes out the grace period for consumers who carry a balance on their credit cards.
“The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate,” said Fed Chairman Ben Bernanke. “Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”
The Fed’s goal is to issue final rules by the end of the year.
The Fed’s proposed rules for the most part mirror the Credit Cardholders’ Bill of Rights passed in July by the House Financial Services Committee.
The legislation by Rep. Carolyn Maloney, D-N.Y., would:
• Require card companies to give cardholders 45 days notice of any interest rate increases.
• Prohibit card issuers from retroactively increasing interest rates on an existing balance unless the cardholder is more than 30 days late on payments. The bill would also allow rates on existing balances to increase if a promotional rate has expired or if the rate adjusts as part of a variable rate.
• Prohibit card companies from charging interest on debt that’s paid on time during a grace period.
• Limit card companies from slapping fees on the remaining interest-only balance of a cardholder who has paid his or her bill on time.
• Require card companies to mail billing statements 25 calendar days before the due date. Fourteen days is the current minimum.
Ms. Maloney said she hopes to bring the measure to the House floor in the next few weeks. Similar legislation is pending in the Senate.
Of course, credit card companies oppose such efforts.
“We have deep concerns that the so-called Credit Cardholders’ Bill of Rights will have serious unintended consequences for American consumers, businesses and the broader economy,” said Edward L. Yingling, president and chief executive of the American Bankers Association.
“If lenders are limited in their ability to adjust interest for customers whose risk levels may have changed, they will have to account for the increased risk by raising prices for everyone,” he said. “That’s unfair.”
Consumer advocates say reform is overdue.
“We strongly support your proposed rule to protect cardholders from increases on existing balances unless a payment is 30 days late,” Consumer Action said in comments to the Fed.
The San Francisco-based advocacy group also supports banning “universal default” practices, under which a cardholder’s interest rate is raised substantially when the cardholder makes a late payment on a different account.
“Under no circumstances is it fair to amend the terms of an account with an excellent payment record – even on a forward-going basis – because of outside circumstances,” Consumer Action said.
It’s true that most consumers don’t read the disclosures sent by credit card companies. They should. But the language used isn’t the easiest to get through.
There is definitely a need for clearer disclosure to consumers and protection against arbitrary interest rate increases by card issuers.
by Pamela Yip
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3 Responses to “Credit Card Rules Must Change”
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Will the proposal for a Credit Card Holders’ Bill of Rights also consider the unfairness of unilaterally reducing the cardholder’s credit limits without there being any default or late payments by the cardholder? Isn’t it unconscionable for the credit card company to search a longstanding cardholder’s entire credit history and decide that that patron already has too many credit cards with outstanding balances, albeit never accompanied by defaults or late payments? If the credit card banks are self-servingly trying to curtail their own credit risks,what about the credit reduction adversely affecting the cardholders’ FICO scores, thus preventing the approval of future credit applications? The current recession worsens when consumers with lowered credit are thereby unable to spend, and business owners are eventually forced to close their doors.
Recently, Senator Chris Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, introduced The Credit Card Accountability, Responsibility and Disclosure Act (C.A.R.D. Act), which is a proposed legislation that will target abusive practices in the credit card industry.
How will this effect the billing cycle if consumer pays early, more than the minimum due, and the company still tacks on a late fee, because they apply the payment to the previous billing cycle, even if that cyle has already been paid?