In a year-end gift to consumers, the Federal Reserve Board, along with the Office of Thrift Supervision and the National Credit Union Administration, announced on December 18 their approval of long-overdue new credit card rules that will limit the arbitrary rate hikes and fees imposed by credit card companies – but won’t take effect until July 1, 2010. The recent announcement arrived in the midst of a widening U.S. recession that continues to necessitate financial relief for consumers, making the 2010 start date of the new credit card rules particularly belated. Regardless of the Fed’s better-late-than-never approach to enforcing the improved credit card regulations, the new rules will benefit approximately 695 million American credit card users once they take effect. The following are some consumer-friendly provisions of the new rules:
New Limits Will Be Imposed on Interest Rate Hikes and Late Fees
According to the Wall Street Journal, the new rules will prohibit credit card companies from raising interest rates more than once a year, unless a consumer has an outstanding payment that is more than 30 days overdue. The once-annual rate hike allowance will apply to both existing balances and new purchases. Lenders will also be required to give you a minimum of 21 days from the statement date listed on your bill to pay off balances, and the bill will include clearly marked payment due dates and times.
Making One Mistake Won’t Open the Penalty Floodgates
The new rules will also do away with the current universal default policy that allows a lender to raise your interest rate simply based on a late payment made to an unrelated creditor. This sneaky little provision, which is the equivalent to kicking you while you’re down, will not be missed by consumers when it departs in mid-2010.
Policies for Paying Down Balances Will Favor Consumers
If you carry a balance, your monthly payments currently go toward paying off your lowest-rate debt first, regardless of the debt accrual’s chronological order. This practice heavily favors the credit card companies, allowing them to profit from the unpaid higher interest rate debt that will not be eliminated until you pay your balance in full. The new rules will turn this policy on its head by requiring credit card companies to apply your monthly payments to higher interest rate debt first. As a result, consumers will pay less money in interest fees and get out of debt faster.
Along with offering future protections for consumers, the new rules also run the risk of triggering a major backlash from credit card companies. In particular, the Fed’s announcement of the upcoming regulations on the heels of a rising credit card default rate trend may create ripple effects throughout the credit card industry, resulting in future lending practices that will negatively affect consumers. Indeed, credit card companies have already started to scale back on lending due to the economic downturn, cutting down on the number of new cards they issue and slashing existing credit limits to try and offset rising payment delinquencies. According to Friedman, Billings, Ramsey & Co. analyst Scott Valentin, there has been a 14 percent drop in new credit card solicitations over the past few months, as well as interest rate hikes of 2 to 3 percentage points and lower credit lines in general. The trend to issue fewer credit cards and hike interest rates may qualify as a sensible economic reaction, but it is also premature. For example, Valentin states that most credit card companies build up a year of reserves in order to offset potential future losses; in addition, recent earnings statements show the industry has faced only small amounts of profit loss so far.
By jumping the gun in their attempts to offset unknown future losses, the credit card industry has guaranteed a bumpy ride for consumers using credit cards in the present. Even worse, there’s no end in sight. Despite the Federal Reserve’s announcement that help is on the way, consumers are on their own until the improved credit card regulations arrive in another year and a half. Combined with an ailing economy, the delayed start date for increased consumer credit protection plus the current industry practice of increasing penalties while lowering credit lines has created a perfect storm of potential credit disaster. As a result, a conservative approach to using credit cards is in every consumer’s best interest, regardless of credit history or current financial situation. In other words, limit credit card usage if you’re looking to emerge from this rocky economic period with your finances unscathed. The consumers who will come out ahead are the ones who use their credit cards only as a last resort or for boosting a credit score rather than as a handy substitute for cash.