The Federal Reserve has come up with some new rules to protect consumers 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 most likely have no idea what the charge 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 credit 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 account 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 charge 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.
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 account 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 charge card accounts is to pay them off every month. Credit card accounts 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 charge cards to borrow cash.
What these new rules would do is protect consumers 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 charge card companies can change at any time.
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