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.
4 downsides of the credit card changes
- Banks to hike fees, restrict credit
- New fees may not get disclosed
- Other abuses remain
- Don't take effect until 2010
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, Mass. "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.
2. New fees may not get disclosed Thanks to changes to Regulation Z, which implements the Truth in Lending Act, issuers must disclose at account opening and give 45-day advance notice of changes in APR, billing cycle and certain categories of fees -- annual fees, transaction fees (for activities such as balance transfers, cash advances and currency conversion), penalty fees and minimum finance charges. Currently, issuers have to notify cardholders only about credit limit changes if the new limit would trigger an over-limit fee or a penalty rate, says Wu.
She worries that because financial institutions must notify consumers before modifying specified fees that banks may simply craft new ones to skirt disclosure requirements. "It's the fees we can't think of right now that we're concerned about, that aren't covered by these new rules."
3. Other abuses remain Consumer advocates largely cheer the rules, but also caution that they don't address all of the abuses in the industry. The regulations don't cap fees and rates, or create over-limit protections for consumers. If you pay a few days late, the credit card issuer can still triple your interest rate for all new charges, after providing a 45-day notice. "We think the punishment doesn't fit the crime with a lot of these hikes. Some of them are 20 percentage points (higher) and that's an awfully big punishment for being late once," says Linda Sherry, director of national priorities for advocacy group Consumer Action in Washington, D.C.
Both Wu and Sherry say they are not averse to caps for fees and rates and contend that consumers shouldn't be allowed to go over their limit -- and get charged a fee -- unless they opt in to the practice.
4. Rules don't take effect until 2010 The rules won't apply for another year and a half, giving issuers time to strategize -- and make adjustments -- to offset any future profit losses. "I think that there will be companies that take this as an opportunity to lock in their increases before the rule takes effect," says Sherry.
Then again, we might see issuers competing with each other for cardholder affinity. Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research in Pleasanton, Calif., says issuers may garner favor with cardholders "in terms of saying, 'We never practiced this, we never did universal default.'" Similar shows of goodwill may win over consumers in a time when many issuers are raising rates and lowering credit limits.
Meanwhile, a push for further reform rages on in Congress. Rep. Carolyn Maloney, D-N.Y., author of the Credit Cardholders' Bill of Rights (H.R. 5244), which passed the House but stalled in the Senate, will introduce a new Credit Cardholders' Bill of Rights in mid-January. At the time of this writing, her spokesman could not comment on how the new bill would differ from its predecessor or the regulations approved on Dec. 18.
What you can doIf you're having trouble paying your bills, call your credit card lender. Many companies have in-house workout programs that can temporarily lower your rate or suspend fees.
Those who aren't in trouble need only keep up the good work. "Watch your statements, read for changes, pay on time -- do everything you can to avoid not paying on time because you're going to be on a bad-guy list like never before," says Hammer.