Happy Holidays, Credit Card Users: Reform is on its Way!
Last updated December 22, 2008
In a year when any headline involving the term “credit” has been overwhelmingly negative, it seems that consumers will be rewarded with some positive changes associated with the credit industry shortly.
New rules which were proposed earlier this year would prohibit credit card companies from increasing rates at will, with some exceptions such as those that apply to people who fail to pay a bill within thirty days. Restrictions and limitations on late fees, universal defaults, shorter payment periods and confusing payment allocations for different balances are also addressed in the nearly 1000 page proposal.
The next and final step for this major reform proposal is a vote scheduled for December 18, 2008, seeking approval of the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration.
The credit card industry naturally is not happy about the reform, but the inevitability of it’s implementation has pretty much arrived. They have warned that interest rates charged on credit cards will rise for all borrowers and that credit limits may be reduced due to of the required changes.
Here is a brief summary of some of the major highlights of the proposal:
- Eliminates double-cycle billing. Also called 2-cycle billing, in this unfair practice a card issuer calculates interest by reviewing a customer’s average daily balance over two months, not just one - which causes many people to pay more than they otherwise would.
- Defined reasonable time to pay monthly bills. Payment due dates will have minimum requirements of 21 days and will not change without notice, as has been practiced by some credit card companies to date. Additionally, credit card issuers would be restricted to reasonable payment deadlines that correlate with standard business hours (by 5pm, for instance) and included acceptance of payment the following business day if a due date falls on a weekend or holiday.
- No more universal default. A common but often criticized practice, this is when a credit card company raises a customer’s interest rate because he or she made a late payment on another, usually unrelated bill. Some large credit card issuers have already voluntarily discontinued this practice.
- Clearer limitations for “over-the-limit” fees. When a hold is placed on an individual’s credit card due to it being held as a deposit for services such as car or hotel rental, the consumer cannot be held liable for any fees charged due to exceeding their credit limits temporarily during the period after which they have completed the transaction, but are waiting for the credit card company to process and release the holds (it can be several days or more).
- Highest interest rate balances paid first. Requires payments to be applied to account balances that carry the highest interest rates first. Current industry practice is to apply all monthly payments to the lowest-interest balances first — thus extending the time it takes to pay off higher-interest rate balances.
- More reader-friendly credit terms. Credit card applications and billing statements would clearly display terms in reader-friendly boxes with large type and have additional disclosures included. Additionally, changes in usage of terms such as “grace period”(eliminated) and “fixed rate”(used only if this is verbatim) are included.
- Credit advertising and marketing. All those “teaser ads”– that really only apply only to those with the highest credit scores– will have to provide clearer disclosure of the offer limitations and requirements so that fewer consumers are “tricked” into a card with a higher rate than they thought they were applying for.
- Relief for consumers with low credit scores. Consumers who apply for “subprime” credit cards are often hit with “fee-harvesting” tactics. This would be banned, or at least minimized in the event of upfront fees that “utilize the majority of the available credit on the account.” Additional restrictions are proposed as far as disclosures and fees for this type of credit card.
- Foreign transaction fees. Any fees charged for purchasing goods or services in a foreign currency or for using the credit card outside of the U.S. would have to be disclosed in a table on credit card applications and solicitations — not just when the account is initially opened.
The reform proposal, which was passed by Congress on December 18, will unfortunately not go into affect until July of 2010, after which these practices of credit card companies that blindside consumers will be put to rest. At least it is a step in the right direction!
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