How will the new credit card rules affect consumers?
Today a new bill was passed by the U.S. Senate with the intent of restricting abusive practices in the credit card industry. A House bill was passed on May 12th and will be reconciled with the Senate version and President Obama hopes to sign it before Memorial Day. So what does this bill contain and what does it mean for consumers?
First of all here is a summary of the new rules:
- Credit card companies will be required to mail a bill 21 days before it is due.
- Universal default will no longer be allowed. This means that borrowers who are late or default on one card would not have their rates raised by another lender as long as the second lender is being paid on time.
- Rates may not be raised on borrowers until they are 60 days past due. As long as the borrower becomes current and pays on time for 6 months after they were delinquent the rates have to be lowered to its original amount.
- Extra fees for paying over the phone or online will be disallowed.
- If you have more than one card with a company, your payments must be applied to the card with the highest interest rate first.
- Issuers have to notify customers of rate changes 45 days before the change.
- Late fees cannot be assessed if the issuer delayed crediting the payment.
- Rates cannot be increased in the first year and promotional rates have to last at least six months.
- Penalty fees for going over the credit limit is disallowed unless the cardholder agrees to it. If the cardholder does not agree to transactions over the limit then the transaction would be rejected.
- Issuers must disclose the time and total interest costs it would take for consumers to pay off a balance if only minimum payments are made.
- Gift cards must keep their full balance for at least five years.
- Consumers under the age of 21 must have a co-signer who is willing to take on the responsibility of the debt unless they can prove they have the ability to pay. Most likely a parent has to co-sign. Additionally limit increases must be approved by the parent.
Finally, a completely unrelated amendment that is going into this bill is that you are now allowed to carry guns in national parks and wildlife refuges again. I am not quite sure that is in a credit card bill.
I think most of these changes are good since they are designed to stop consumers from falling into costly traps such as a $35 charge for being $2 over limit. Additionally, notifying a consumer how long it would take to pay off his or her debt is a good reminder as to how expensive credit can be and that notice with every statement may encourage people to pay more than the minimum. I think the item that allows a delinquent borrower to keep the same rate as before is a bit questionable because it could give people the impression that there is no consequences if they skip a payment or two. If a borrower becomes deliquent there is a higher chance that he or she would default, and so it makes sense to raise the rates to offset the risk. Another rule that I find somewhat detrimental and restrictive is that young people up to the age of 21 have to get a cosigner. This may prevent many responsible young adults from building up a credit history if they do not have a person who is willing to cosign.
Credit card companies generally do not make much money off borrowers who default completely, and the best customers for them are those who pay the minimum balance on time. Those who pay the entire balance on time and incur no interest or penalties are ironically known as "deadbeats" in the credit card industry. I think the changes will definitely prompt credit card companies to be more strict in who they hand cards to. This could mean that people with little credit history or low credit scores will have a harder time getting a card and the interest rates may be higher than now, but that may encourage more people to save their cash to buy things.
One potentially negative effect that has been discussed in many media outlets is that credit card issuers may want to recoup their "losses" on deceptive practices from the card payers who pay their balances in full every month. Reward programs may be cut, and the annual fee may return. However, I think consumers with great credit and the discipline to pay in full every month will just abandon the cards that try to squeeze more out of them. After all, issuers still make money off these customers through transaction fees. Even though the margin is smaller, these customers are better than those who default completely. I do believe that reward programs may be less rewarding in the future, so it might be worthwhile to cash in those points while the rewards are still good.
These changes will not go in effect until early next year, and the credit industry is not too happy with them. Do you think that these rules are reasonable? Have you dealt with any abuse from credit card companies?