The Federal Reserve Board is proposing changes to the way that credit card companies charge interest and charge fees. For some time now many credit cards have been using methods to squeeze every little penny out of you that is possible. As the economy has slowed, incomes have stagnated, and inflation has risen many consumers are using their credit cards to make ends meet. Many don't realize how expensive this can be. If you think that the changes proposed are a good thing be sure to let your representatives know and encourage them to make sure these changes are implemented.
From the Federal Reserve Press Release July 15, 2008: Highlights of Proposed Rules Regarding Credit Cards and Overdraft Services
- Time to Make Payments. The proposal would prohibit banks from treating a payment as late unless the consumer has been provided a reasonable amount of time to make that payment. There would be a safe harbor for banks that send periodic statements at least 21 days prior to the payment due date.
- Allocation of Payments. When different annual percentage rates (APRs) apply to different balances on a credit card account (for example, purchases and cash advances), banks would have to allocate payments exceeding the minimum payment using one of three methods or a method equally beneficial to consumers. They could not allocate the entire amount to the balance with the lowest rate. A bank could, for example, split the amount equally between two balances. In addition, to enable consumers to receive the full benefit of discounted promotional rates (for example, on balance transfers), during the promotional period payments in excess of the minimum would have to be allocated first to balances on which the rate is not discounted.
- Applying Rate Increases to Existing Balances. The proposal would prohibit banks from increasing the interest rate on outstanding balances unless the increase is due to: (i) the operation of an index (in other words, the rate is a variable rate); (ii) the expiration or loss of a promotional rate (provided the rate is not increased to a penalty rate); or (iii) the minimum payment not being received within 30 days of the due date.
- Two-Cycle Billing. The proposal would prohibit banks from imposing finance charges based on balances on days in billing cycles preceding the most recent billing cycle, a practice that is sometimes referred to as two-cycle billing.
- Financing of Security Deposits and Fees. The proposal would address concerns regarding subprime credit cards by prohibiting banks from financing security deposits and fees for credit availability (such as account-opening fees or membership fees) if charges assessed during the first twelve months would exceed 50 percent of the initial credit limit. The proposal would also require financed security deposits and fees exceeding 25 percent of the initial credit limit to be spread over the first year.
- Credit Card Holds. The proposal would prohibit banks from imposing a fee when the credit limit is exceeded solely because a hold was placed on available credit. This can occur where the final dollar amount of a transaction was not known in advance (for example, when a consumer checks into a hotel, a hold is placed for the expected cost of the stay).
- Firm Offers of Credit. The proposal would require banks making firm offers of credit advertising multiple APRs or credit limits to disclose the factors that determine whether a consumer will qualify for the lowest APR and highest credit limit advertised (for example, the consumer’s credit history, income, and debts). A safe harbor disclosure is provided.
All of these in my opinion are practices that are just annoying and I am glad to see that pending approval of the changes many of them will be prohibited. There are a few that annoy me in particular.
Mailing a statement with only 14 days to the due date seems ridiculous. Some mail takes up to 7 days to get to its destination. This is of course providing it doesn't get lost in the mail. Allowing 21 days gives people time to receive the mail, let it sit for a day or two until the weekend comes so they can pay bills all on one day and then make sure it gets mailed out to arrive on time. Of course, if you use on-line bill payments you can initiate payments with only a day to spare and still get it there on time.
The practice of allocating payments to the lower APR balances is one of the practices that just perturbs me. You thought you were doing the smart thing by transferring your balance to a card offering 0% interest for 12 months on transferred balances. Think of the money you are saving. As a bonus, the interest rate on the card is only 9.9%.
On your way home from work, you realize you are low on fuel. You stop at a station and decide to use your new low interest card to pay for that fuel. (Your wife won't let you carry enough cash to actually pay for fuel so you have no choice but to use credit). You figure you will just send in an extra $100 to pay off that charge when you make your next payment. To your surprise your 0% rate appears to be false when you are charged interest charges. A closer look reveals that your entire payment was applied to the 0% balance transfer. Your original plan was to pay off the card in 10 months. So for the next 10 months your single $100 purchase is going to accrue interest at 9.9% until you pay off the lower 0% balance. Your fuel just cost you twice what you paid for it. It will be nice if they would apply your payments equally to the various interest rate levels.
The other practice that gets me going is the offer of credit. You already get more credit card offers in your mailbox each week than you do bills. If we were to make it illegal to mail out unsolicited credit card offers we could save thousands of trees and reduce identity fraud, but that is another matter. On your offer you are told that you can transfer balances from other credit cards and get a great rate. All looks great as you read the terms. When you read the fine print it states that you were sent the offer because a review of your credit profile showed that you met the requirements of the offer. I guess the credit card companies got tired of printing so many different offers and decided to just add some fine print that states that your interest rate and credit limit may differ than the offer advertised. They require you to apply for the credit with the expectation of a lower interest rate than your current card. Again you pat yourself on the back because you are saving money on interest. A few weeks later you find that you didn't qualify for that great rate after all. Instead the balance transfer is completed and your rate is a full 2% higher than your old card. Thanks! I look forward to being able to read the terms of a credit offer and almost understand it and actually get what I expect and not feel like I was swindled.
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