In late 2008, the Federal Reserve Board, which oversees and regulates the credit-card industry, cracked down on unfair and deceptive practices by credit-card companies, including the fees and interest rate increases blamed for pushing Americans deeper into debt.
Sounds fabulous, doesn’t it? One television news anchor reported these events as “life changing” for anyone with credit-card debt. It was as if she was announcing that everyone with a credit card just got a bailout.
Not so fast, missy. It’s true that the Fed made changes to the rules for credit card-issuing banks in favor of consumers, but they gave credit-card companies an 18-month grace period before these changes take effect, which is in July 2010. Keep in mind, also, that these changes are not laws, but rather rules for Federal Reserve-member banks, thrifts and credit unions. Congress, on the other hand, can pass federal laws that are binding. All credit cards, also known as “open-end credit,” are subject to the Fair Credit Billing Act, which was passed in 1974. It was amended in 1986.
Rep. Carolyn B. Maloney, D-N.Y., introduced a bill in Congress that would amend the Fair Credit Billing Act once again. It’s called the Credit Cardholders’ Bill of Rights, and it would stop a lot of the flagrant abuses by credit-card companies. The bill was passed in the House of Representatives in September 2008, and the Senate Banking Comittee approved the measure in March. It now awaits action by the full Senate.
Back to the changes announced by the Federal Reserve Board. Here are the highlights:
• Companies will not be able retroactively to raise interest rates. If they raise a rate, it must apply to future purchases only and the account holder must get 45 days’ notice. However, the issuer will be able to impose the default rate on the entire balance if the holder is late or does something that breaches the original agreement;
• Card companies will be required to give consumers at least 21 days to make payments before late fees can be imposed;
• Two-cycle billing will be banned;
• Many accounts have different interest rates for different portions of the balance (balance transfers, cash advances, etc.). Under the new rules, any payment the consumer makes beyond the minimum will have to be applied to the balance with the highest interest rate or spread proportionately to all balances.
These changes, when they go into effect, will be good for consumers and bad for card issuers. In fact, one report suggests that these simple changes will cost card-issuing banks millions each month in lost revenue. Don’t think they are not scrambling already to find ways to recoup that money even before they lose it. That’s why we need to start watching for new fees and new rate increases during the interim.
Paying off all your credit-card debt is the best response to these new developments. That is the only reasonable recourse we have against the outrageous practices of credit-card issuers.
What to consider before accepting an invitation
Monica” recently received an invitation from Capital One to transfer balances to a new credit card at zero percent interest until March 2010. “Would I be shooting myself in the foot if I accepted this offer and transferred two high-interest balances, currently $4,000 total?” she muses. “I’m worried this is a trap.”
There are many things you need to consider carefully before making your decision.
Bait and switch. If you read the fine print on that invitation, you will see that Capital One retains the right to substitute a different credit card once you’ve accepted the offer and they check your credit history. You may or may not get zero percent interest.
Credit score. If you get this deal, more than likely the credit limit will be the same or very close to the total amount you transfer, or $4,000. That means, for at least the first few months, you will be using 100 percent of your credit limit. That is bad for your credit score. Really, really bad. Ideally, you never should use more than 30 percent of your limit.
Not set in stone. Keep in mind that Capital One will include a clause in your agreement that says they can change the terms at any time for any reason. (This will change, but not until July 2010.) Here’s the scary thing: They could use your newly lowered credit score as the reason to do that! It’s a real Catch-22.
Real interest rate. Think July 2010. That’s when new credit-card rules go into effect that will prevent credit-card issuers from increasing your interest rates retroactively. If something happens that prevents you from reaching zero balances before then, expect whatever rates you’re paying after March 2010 to shoot up on, oh, say, June 15, 2010. They’ll have one last opportunity under the old rules.
You may determine it’s worth the risk to accept this offer to get rid of double-digit interest you may be carrying on these two accounts at this time. The best option here is to do everything in your power to pay these debts as quickly as possible. If you have a rock-solid plan to do that within 12 months, it just might be worth the prospect of a low credit score for a while to accomplish that worthy goal. Once you are at a zero balance, your credit score will begin to improve, provided you do not close that account.
All that to say that if I were Monica, I believe I would take the risk. That’s because I hate credit-card debt so much that I’d be willing to accept the lesser punishment of a low credit score, along with the possibility of an increased interest rate, for a while. That would be like a kick in the rear end to force me into greater sacrifice in other areas to pay the debt faster than I ever dreamed possible.