On Dec. 18, regulators approved
new credit card rules that offer significant protections for consumers. The regulations passed by the Federal Reserve Board, Office of Thrift Supervision and the National Credit Union Administration amend Regulation AA regarding unfair and deceptive acts and practices and the Truth in Lending Act. Some of the major changes include restrictions on retroactive rate increases, a ban on double-cycle billing and limitations on how issuers can apply payments to multiple balances.
This set of regulations is "deeper and more far-reaching than anything I've seen in my 25-year career in banking," says Robert Hammer, chairman and CEO of R.K. Hammer, a bank-card advisory firm in Thousand Oaks, Calif.
Still, the rules crack down on only the most egregious credit card practices and may bring about ugly consequences for credit card borrowers.
1. Banks to hike fees, restrict credit
Under the new rules, one of the biggest changes is that issuers cannot apply a rate increase to existing balances except in a few circumstances. They can increase your rate if you pay at least 30 days late, if a previously disclosed promotional rate expires or if the rate movement is tied to an index, as with variable-rate cards. This ends the practice of universal default on existing balances -- issuers can't raise rates on existing balances based on performance with other lenders. If they want to increase your rate after the first year the account is open, they must give you 45 days' advance notice and can only apply the higher rate to new charges.
The 45-day requirement goes for all changes to the rate, billing cycle and certain fees -- consumers get 45 days' notice, instead of 15, and will see the changes presented in a table, a clearer version of the Schumer Box we see in credit card solicitations.The restrictions on applying rate hikes to pre-existing balances are notable because retroactive rate hikes were "one of the most unfair things about credit cards," says Chi Chi Wu, a staff attorney at the National Consumer Law Center in Boston. "You don't have any other kind of product in the U.S. where they can reach back and charge you more for something you've already bought."Yet what's good for consumers in this case is bad for banks. The loss in interest income as a result of the ban on retroactive rate hikes will cost the credit card industry $5.5 billion in 2010, $11 billion in 2011, and every year thereafter, says Robert Hammer, chairman and CEO of R.K. Hammer, a bank card advisory firm in Thousand Oaks, Calif. To offset their losses, Hammer contends issuers must raise fees and further tighten access to credit."If the average late fee goes from $39 to $49 -- which I think it will in the next year to two years -- if you're delinquent all the time, get set, strap yourself in. It's going to be a bumpy ride," Hammer says.
The end of universal default means that banks will no longer be able to raise rates on customers if they start having trouble paying other creditors. "That has a limiting effect on the price of credit. If we can't get an accurate picture on the borrower's credit risk, then the industry will respond by increasing rates, lowering lines of credit or increasing fees, etc. to account for that uncertainty," says Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a Washington, D.C.-based trade association that represents 100 of the largest financial services companies. He argues that the effect will be that "individuals who manage their credit well will thereby then be subsidizing those who don't."As credit availability continues to shrink, Hammer predicts that those with FICO scores of 680 or less may have trouble getting new cards. Already about 50 percent of domestic banks reported raising minimum credit scores, according to the Federal Reserve's senior loan officer survey released in October. Around 60 percent said they granted fewer cards to people who didn't meet their scoring requirements.Next: "... the credit card issuer can still triple your interest rate ..." >Bankrate.com is the Web's leading aggregator of information on financial products including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees. Visit Bankrate.com to get the tools and information that can help you make the best financial decisions.
