Monday, December 22, 2008

Good News/Bad News for Credit Card Holders

It has been a good news/bad news week for consumers who use credit cards. Labeling current credit card practices “deceptive” and “unfair,” the Federal Reserve proposed new rules for credit card issuers. What is most striking about reading the list of practices the Fed now intends to abolish is that these tactics were ever legal in the first place.

First the good news–if adopted the new rules will prohibit such practices as:

• Assessing hefty late fees if a payment arrives one or two days late. Borrowers will have a reasonable grace period of 21 days before a payment is deemed “late.”

• An interest computing practice known as “double-cycle billing.” As it stands now, a balance that is not paid in full is assessed interest beginning from the date of purchase rather than from the end of the grace period.

• Charging high fees for exceeding the credit limit solely because of a hold placed on the account. Consumers often don’t know the amount of holds when they check into hotel rooms or rent cars. I’ve had $1000 holds placed on my account just for checking into a $200 hotel room.

• Applying payments to the part of the balance with the lowest interest rate. Under the new rules, any payment above the minimum will have to be applied to the balance with the highest interest rate. It is not uncommon for consumers to have balances with multiple interest rates because cash advances and balances transfers often have different interest rates than purchases. Currently banks apply payments to balances in ways that maximize finances charges by applying all money paid to the part of the balance with the lowest interest rate.

Now the bad news: These are “proposed” regulations, not laws and they will not take effect until July 2010. As Bob Sullivan noted in his blog: “A 300-page report by the Office of Thrift Supervision described bank misbehavior in great detail, at times using stinging language.” Federal regulators “then invited card issuers to continue those unfair tactics for the next 18 months.”

A December 18 report on the NBC Nightly News stated that the rationale for allowing these practices to continue was to give banks time to adjust. A spokesperson for the American Bankers Association, Nessa Feddis, stated on camera: “The regulations, in effect, require the credit card industry in effect to completely dismantle and rebuild their credit card business model.”

This is a bizarre defense of an indefensible delay. Maybe in the future the Feds should give organized crime syndicates time to dismantle and rebuild their “business model” instead of busting them.

In the mean time, while the banks retool, all of the practices listed above are still in use. I’m not optimistic that a “rebuilt” credit card business model is going to be any better for consumers. The Federal Reserve is taking steps that should have been taken many years ago in response to the current economic crisis. I think the banks are creative enough to put together a different set of deceptive practices that will still gouge consumers. And, once the crisis is past, federal regulators and Congress will go back to looking the other way.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

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