Saturday, May 9, 2009, AM | 1 Comment
The House of Representatives On Thursday, April 30 2009 passed legislation that promises strong consumer protections from credit cards issuers.
The Cardholders’ Bill of Rights aims to strengthen consumer protections offered by Federal Reserve rules and possibly speed up the date they go into effect (which, for now, is July 1, 2010).
The bill recently cleared the House Financial Services Committee by a decisive 48 to 19 vote, passed by a bipartisan vote of 357-70.
Here are some of the most controversial issues for consumers.
Lowering credit limits
Credit card companies have been slashing borrowers’ credit limits in an effort to contain their rising default rates, in some cases to below the borrowers’ outstanding balances.
Reducing one’s limit close to or below the outstanding balance may not only trigger an over-limit fee, it can also hurt the card holder’s credit score.
That’s because the credit utilization ratio, or the amount of credit used relative to the available limit, determines 30% of your credit score.
Under the new Fed rules, issuers have to give 45 days’ notice if the reduction brings the cardholder close to their outstanding balance.
Raising interest rates
The Fed may have brought short-term interest rates close to 0%, but credit-card issuers have been lifting interest rates across the board.
That means borrowers will take longer to pay off debts – and will pay more interest as they do so.
Under the new Fed rules, banks are prohibited from increasing rates in the first year after opening a credit card account. Afterward, a 45-day notice is required.
Penalty APR as high as 32%
Penalty Annual Percentage Rates (APR) are high interest rates that can be triggered by the slightest infraction such as just one payment that is received a day late.
Even the most responsible credit card user could get hit with a 30% or higher penalty rate if they pay a day late or exceed their limit by $1.
That means consumers end up paying high interest on past purchases.
Under the new Fed rules, such rate increases are prohibited, except when a payment is more than 30 days late.
Issuers make consumers pay balances with lower-interest first and then higher-interest debt
Issuers apply consumer payments to low-rate balances while their high-rate balances keep growing.
Anyone who takes advantage of a low-rate promotion, such as a 0% APR balance transfer, will pay more than 0% if they use the same card for purchases at a regular rate.
That means any payment you send in will go to the 0% balance while your purchases keep running up high interest charges.
Under the new Fed rules, payments exceeding the minimum are to be allocated to highest-rate balance, or to all balances on a pro-rated basis.
Closing down consumers accounts
In an effort to limit their risk exposure, banks have been closing unused credit cards.
Closing an unused credit card can lower your score, since it lowers your available credit and increases your credit utilization ratio.
Under the new Fed rules, so far, there is little to address this.
Cutting back on rewards
Scaling down on rewards programs, some issuers have been quietly slipping in expiration dates for rewards points.
It may do no monetary harm, but is unfair to consumers who may favor one card over another because of its rewards program.
Under the new Fed rules, the Fed doesn’t address rewards programs.
Reducing grace periods
Grace periods – the time between the statement closing date and the date by which cardholders must pay to avoid interest charges – have been shrinking, from an average 25 days in 1995 to 22.5 days in 2008.
By the time they receive their statement, cardholders may have just days to mail a payment or risk being hit with late fees and penalty rates.
Under the new Fed rules, banks are required to send statements at least 21 days before the payment due date.
Getting students hooked on debt
On college campuses, card issuers are practically shoving credit cards in students’ pockets, making credit seem easy for those already taking on the burden of tuition and student loans.
Debt levels have increased 44% among college seniors since 2004, who now owe an average $4,100 on credit cards.
Under the new Fed rules, issuers are prohibited from knowingly issuing cards to individuals under 18 who are not emancipated minors.
In a Nutshell
All the fine print and the game playing with deadlines and billing procedures is a gold mine for creditors, especially targeting young borrowers and the most harried and economically vulnerable among us.
As taxpayers, the U.S. consumers are bailing out bankers with money from one pocket, while paying exorbitant charges to many of the same lenders from the other pocket.
Credit cards are useful and convenient, even in a recession. But harder financial times make the public wholly less willing to tolerate lending practices they ignored during credit-besotted times.
Consumers will not put up with bankers trying to sop up red ink from real-estate losses with credit-card fees. Greedy creditors brought this legislation on themselves.Facebook.com/doable.finance