Possible protections for credit card holders

By Philip Brewer. Last updated 20 May 2008. 5 comments
Photo: Philip Brewer

The Federal Reserve has proposed some new rules to protect people from a list of abusive lending practices.  The changes aren't in effect yet, and may not actually go into effect.  It's worth looking at the proposals, though, to understand what's been going on just lately.  If you haven't been paying attention, you probably have no idea what the credit card companies can legally do to you.

The things that would be prohibited would be:

Increasing the rate on a pre-existing balance

At the moment, there are pretty much no rules about this.  Your card agreement probably says how they calculate the rate--but it also says that they can change the agreement at any time, including the part on how to calculate the rate.  Many card agreements also provide for you to "decline" to accept changes--but if you use the card after they send out the notice of changes, that's the same as accepting the new agreement.  And some cards don't even offer that protection--they can raise the rate for any reason, or for no reason at all, and there's nothing you can do about it except pay the new rate until you manage to get the debt paid off.

Applying payments to maximize the interest charges

Your credit card agreement says how they'll apply any payment that you send in.  It matters, because parts of your balance are at different rates.  If you read the details, things are often set up to pay off low-rate parts of the debt first, leaving you paying on high rate debt for as long as possible.  Under the new rules:

Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.

Imposing interest charges using the "two-cycle" method

The "two-cycle" method is a set of rules for calculating the interest owed in such a way that you don't get any "grace period" if you don't pay your card off in full every month.  If you carry a balance all the time, it doesn't matter.  But if you usually pay your card off, but occasionally take an extra month to get back to zero, the two-cycle method can very nearly double the interest you pay.

ARTICLE CONTINUES BELOW
What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

The rules would also require that banks give card holders a "reasonable" amount of time to make payments.  It used to be that card holders got almost 30 days--basically, you had until the day they printed out your next bill.  Credit card companies, though, have been shortening the grace period, especially for their riskier customers.  For some cards, it's gotten to the point where you really have to stay on top of your bills every day, in order not to be constantly late on your payment.

Of course, the only sensible thing to do with credit cards is to pay them off every month.  Credit cards are a great payment mechanism, but a terrible way to borrow money.  Everybody knows that.  And these new rules wouldn't really offer much to the people who do use their credit cards to borrow money.  

What these new rules would do is protect people who fail to run an error-free bill-paying and agreement-reading system.  As things stand right now, someone who pays every bill in-full, but who is only 99% successful at paying on-time, could easily end up owing hundreds of dollars in fees, penalties, and interest.  These rules would ease up some of the worst of the "gotcha" effect.  (And it certainly seems that some banks have been changing their rules specifically to set their customers up to make occasional small errors--and turn those errors into big fees for the bank.)

The rules are open for public comment.  No doubt the big banks will be commenting.  They'll have statistics that show that customers who make a late payment are much more likely to default than customers who are never late.  Maybe a few consumers will comment about the basic unfairness of agreements that the credit card companies can change at any time.

Links to the detailed rules and on how to comment are in the Federal Reserve's press release on rules to prohibit unfair practices.

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Guest's picture
Guest

I hope they do something about online payments.

Recently I got shot with an online gotcha. I sent in my payment on a Monday evening, with the payment due on Wednesday. When I got the next bill I was upset to see a $25 late fee and, of course, high interest charged for my balance because it was late.

Wait a minute, I sent in my payment two days early!

After calling to complain, a customer service rep pointed out that the online agreement says payments received after 5 pm will be counted the next day, and that online transactions may take up to 2 days to process. So I got screwed.

I know for a fact (from my other credit card) that online transactions are nearly instantaneous. The 2 day processing time is just another way for them to catch you off guard and charge more fees.

I ended up cancelling the card because they would not take off the late fee and interest. I'm still mad I had to pay that, but this is one of those fine print things that needs to be fixed.

Philip Brewer's picture

Yeah, there's a lot of that going around--banks setting their customers up to make mistakes so that the bank can charge a fee.

It's really sad that such behavior was probably the most profitable path for a bank over the past 20 years or so. 

All their good customers will have done what you did, and stopped doing business with the bank--so that eventually, they were left with nothing but the losers.  The thing was, the sort of loser who had no choice but to be treated that way by the bank (or else not have a credit card at all) was actually a very profitable customer for the bank--they paid huge amounts in interest and fees, and could never move their business because they had a big debt they couldn't pay off and a terrible credit rating.

No doubt the reason so many banks had zero-interest balance transfer deals was to capture exactly those customers:  a balance transfer was about the only way those customers would be able to leave a bank that was screwing them.  (Of course, the bank was only offering the deal because they wanted to get in on the hot customer-screwing action.)

My expectation is that we'll see less of this going forward.  Those customers are going to turn out to be big money losers for the banks over the next few years.  Those same people who paid the big fees and penalties are going to end up being big defaulters as the economy gets worse.  The banks who treated their good customers badly (because their bad customers were the most profitable) are going to be the banks that end up charging off the most in credit card "assets" that turn out to be worthless.

We can only hope that the banks who provided good service on fair terms will turn out to be the most profitable going forward.  That'd be good for everybody.

Guest's picture
Will

I'm not against credit cards, on the contrary. I think they offer great benefits if you know how to use them right. But something has to be done when it comes to the
credit card industry's practices
. It's refreshing to see the government do something about it.

Fred Lee's picture

I agree that it's promising that the government is taking steps to protect consumers, but in the end, it's up to the consumer to protect the consumer through responsible practices. Besides, it stands to reason that the credit card companies and banks have huge lobbying efforts that will only promote their bottom line, so what is really going to come of this legislation?

After all, when you look at the current mortgage mess, not only did the regulators allow the situation to continue on it's precarious path, but now they are bailing them out with tax dollars. In this environment, can the government really be counted on to take on big business in the interest of the people?

Thanks for the info, BTW. Just another step for consumers to be more informed, as you mentioned.

Guest's picture

I agree that ultimately, consumers are responsible for their own financial well-being. But things like two-cycle billing impact people who are using cards responsibly -- and can make becoming responsible a discouraging uphill battle. I say let the credit card companies earn their interest fair and square.