Becoming Human

New Credit Card Rules Effective 2/22/2010. February 24, 2010

The new Federal Reserve rules for credit cards went into effect February 22, 2010.  Do you feel better yet?  Of course the rules were designed to benefit consumers and, in some instances they do, but in some they are meaningless or may even harm consumers.  To some extent it could be argued that the new rules promote socialism.  Lenders have tried to impose higher costs on negative behavior that increases the risk to the lender, like going over credit limit, paying late, and having a declining credit score.  The new rules restrict the lender’s ability to target these bad behaviors so they may have to, instead, increase the costs to everyone.   In other words, low risk borrowers could end up subsidizing higher risk borrowers.  The new rules cover three areas: disclosure of terms, limits on rates and fees, and changes in billing and payments.  In discussing these rules below, I tend to use the word “lender” rather than “credit card company” to reinforce the notion that you really are a borrower dealing with a lender, the bank.  The credit card company is just the marketing and servicing arm of a bank.

RATES AND FEES

Over-Limit Fees:

Over-limit fees may be largely a thing of the past.  Now such fees are permitted only if you “opt-in,” that is, if you affirmatively agree that the lender can charge you a fee if you go over your limit.  There are two negatives to this.   Most people will not opt-in so more people will be denied credit at the point of sale, which could be both inconvenient and embarrassing.  Also,  a significant amount of profits came from over-limit fees.  Now that loss of income will have to be made up somewhere else, perhaps in higher rates for all.

Rate Increases:

Any introductory “teaser” rates on a new account will now have to last for at least 6 months.  Other than this, lenders can, as they could in the past, raise your rates for any reason as long as they give you the required notice), but under the new rules they cannot do so during the first 12 months.  After that they can increase your rates, but only on new balances (new purchases) not on existing balances.  This is a significant benefit to consumers, because in the past, lenders invariably applied the new, higher rate to whatever you currently owe plus whatever new purchases you make.  Now your old interest rate will continue to apply to your old balance.  Previously, if you got a notice that your rate was being increased you could close your account and pay it off at the old rate.  Now you do not have to close your account.  You can keep your account open and continue to pay your balance at the old rate and just be aware that any new purchases will have the new rate.

DISCLOSURES

Payoff Estimate:

The major new disclosure is that lenders have to show you on your monthly statement how long it will take to pay off your balance if you make the minimum payment and how much you will need to pay each month to get your balance paid off in three years.  Typically, it would take much more than three years for many people to pay off their balance if they only make the minimum payment.  Of course, this assumes you do not make any more purchases that would add to your balance.  For that reason lenders opposed having to add this information as it could be misunderstood by consumers.  They also opposed it because it was expensive to program the computers to calculate the information.

Notice of Rate Increases:

Previously, lenders had to give 15 days notice prior to increasing your rate.  Now they have to give 45 days notice.  Of course this does not apply if the increase is simply because you have a variable rate tied to an index like the prime rate and the prime rate goes up.  Even in the past, you would get 15 days before the interest rate change took place at the beginning of the month, and since you don’t get billed until the end of the month, in reality, you often got an about 45 days notice before the bill was due.  Now with 45 days notice prior to the new rate going into effect, you may really get about 75 days notice.  This could turn out to be a bad thing.  Credit card companies hire as many math Ph.D’s as they can to develop models that will determine the risk, and therefore the pricing, for each person as precisely as possible.  This makes the rates as fair as possible.  With the increased notice period, they will have to look at outdated credit report information to make their determination of who has an increased risk and should have increased rates.  This means if your credit worthiness is improving you may get included in the group whose rate will be increased simply because the law does not allow the lender to look at your most recent credit information at the time it must make it’s decision.   As we have seen above, the change in interest rate now applies only to new purchases, not existing balances.  With that change, there was no need to also increase the notice period.

BILLING AND PAYMENTS

How Payments Are Applied:

One of the most significant changes, especially if you are a fan of low rate balance transfers,  is that payments must now be applied to the balance with the highest interest rate.  In the past, the way lenders made money from zero percent or low rate balance transfers was that they kept higher rate balances outstanding for a longer time.  Generally, they would apply payments of principal to the lowest rate balance first.  This means if you have a 0% balance transfer, $5000 in purchases with a 12% rate and a $3,000 cash advance at 15%, the payments would go toward paying down your balance transfer and the bank would continue to earn 12% and 15% on the other balances.  Only when the balance transfer was fully paid off would any of your principal payments go toward the purchase balance, and then finally to the cash advance balance.  Now, the payments will have to go toward the balance with the 15% rate until that is paid off.  It seems like the fair thing to do, but already banks have started offering fewer choices of low-interest rate balance transfers.   Some 0% offers may still be found, but they are rare.

Payment Dates and Times:

The lender must mail your statement at least 21 days before payment is due.  Perhaps more significant is that the cut-off time for payments cannot be earlier than 5:00 p.m. on the due date.  Previously, many lenders would use an earlier cut-off time so that a payment received at, say, 2:00 p.m. would be treated as if it were received the next day.

Double-cycle billing:

In the past, some lenders would use a sneaky way of getting extra interest.  If you did not pay off your balance in full, they would charge interest on both the current billing period and the previous billing period.  This practice, called two-cycle or double-cycle billing, is now prohibited.  This would have been an important benefit to consumers, but it is really meaningless since all major credit card companies stopped doing it a few years ago.

Of course, this is not the end.  More changes are coming in August, and Barney Frank wants to create a new Consumer Financial Protection Agency that would oversee credit card companies, as well as most areas of consumer finance.

Nothing herein is or is intended to be legal advice.  Consult your own attorney regarding your particular situation.