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On Dec. 18, regulators approved sweeping credit card reforms that will provide significant benefits for consumers.
"The strong new regulations announced today by the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration are unprecedented in their scope and signal the beginning of a new market structure for credit cards," Edward L. Yingling, president and CEO of the American Bankers Association, said in a statement. He says the regulations crack down on practices such as universal default, double-cycle billing and the application of rate hikes to existing balances.
The rules, some of which were first proposed in 2007 and others in May 2008, will take effect July 1, 2010. The OTS-approved version will apply to savings associations, federal credit unions will abide by the NCUA rules and the FRB regulations will pertain to banks.
Among the upcoming changes:
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No rate increases on existing balances. The issuer cannot apply a rate hike to your balance unless you're 30 days late making a payment, a promotional rate expires or the adjustment is tied to an index-related movement. The company can apply a rate increase to future balances, provided the account has been open for a year and the company provides 45 days' advance notice, but they can't retroactively zap charges you already made. (Currently, issuers only have to inform cardholders 15 days prior to a rate increase.) They can do so, however, if you pay 30 days late.
This change will end universal default for existing balances. The company can jack your rate for future purchases, but it has to give you 45 days' advance notice.
- No more double-cycle billing. Double- or two-cycle billing is a method of computing interest charges that uses the average daily balance from the current month and previous month. While such a ban protects consumers, Curtis Arnold, the founder of CardRatings.com, contends it's not a huge win since most issuers have ended this practice.
- No pro-issuer payment allocations. When an account has multiple balances at different interest rates, any money paid over the minimum must be applied either to the balance charged the highest rate or equally to all balances. This change helps consumers with multiple balances -- due to balance transfers, cash advances and new purchases -- save money in finance charges when they pay down balances.
- Limits on "fee-harvester" cards. Fee-laden credit cards meant for those with subprime credit -- sometimes referred to as "fee harvester cards" -- can only charge a fee of up to half of the credit limit during the first year after issuance. Fees larger than 25 percent of the limit can't be applied in the first billing cycle but must be stretched over at least the first half of the year after the account opens. (How these cards and fees work is described in detail in this Plastic Rap blog entry.)
- More time to send payments. Card issuers must give cardholders a "reasonable" amount of time to send their payments. The guidance is that financial institutions send bills 21 days in advance of the due date.
The bad news
Unintended consequences may come back to hurt consumers once the reforms are woven into bank policy. Arnold worries that rates will rise across the board because banks will not be able to price accounts based on risk. Zero-percent promotional offers may disappear, he cautions.
Those with marginal credit may see lower credit limits and higher rates, notes Greg McBride, senior financial analyst at Bankrate.com. Borrowers with bad credit may have a tough time getting credit cards at all. He also says we may see fewer fixed-rate cards.
The rules also don't take effect until mid-2010. Financial institutions have a year and a half to figure out how to offset the lost income. Arnold expects some issuers to implement the changes early in 2009 but thinks others "will fight it tooth and nail until the last minute."
Since the rules won't dig in for some time, work on paying down balances and check your statement each month to see if your limit or rate has changed. Use cards you want to keep at least once every six months, buying something cheap and paying it off. Negotiate adverse actions with your bank. Find competitive credit card offers on Bankrate.com.
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