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Credit Card Reform in the Works?
I don't know how I missed this (although most of my research has been in balance chasing), but it looks like the Federal Reserve, Office of Thrift Supervision, and the NCUA are voting tomorrow on some major credit reforms including:
- Prohibiting credit cards from raising interest rates unless the cardholder is more than 30 days late.
- Change how banks are allowed to apply payments when there are two APRs on the account (paying the higher APR balance first)
- Banning "universal default" interest rate hikes
- Banning "double-cycle" billing.
- Prohibiting companies from charging fees or overdraft protection unless customers are given the chance to opt out (WaPo makes it sound like this last one won't pass).
It's about time, and I really hope these pass! I haven't found a recommended timeline for implementation, but if the Fed is willing to drop interest rates like they did yesterday then maybe there's hope. It makes sense - if we're not being hamstrung on interest rates, then maybe we'll spend more money.
Of course there's always the possibility that chasing down balances will become more common as lenders, now unable to hike up interest rates, try to dump higher-risk customers from their books.
On the surface that doesn't sound like a bad idea - if you can't afford high balances, then maybe you shouldn't have one - but the fact is, credit companies are improperly profiling people when deciding who to chase down. If you live in an area with a lot of foreclosures, if you work in an industry with a lot of lay-offs, if you start charging small things like coffee or groceries, or if you make unusual charges like to a therapist or marriage counselor (indicating that your life circumstances have changed), you can see your limit lowered to just above your existing balance. Then the domino effect: your debt to credit ratio goes up, your FICO score goes down, and your interest rates across the board go up.
So, while the reforms on the table are outstanding, I would like to see this last practice addressed as well.
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Thanks for this catch!
December 17, 2008 1:32 PM | Reply | Permalink
Thanks TheraP - means a lot :)
December 18, 2008 12:11 AM | Reply | Permalink
I've been following this too. Its a start but nowhere near enough. 30% interest rates should be illegal. I don't expect a whole lot of movement with this in the Obama Admin since Biden is a Delaware guy.
CBS did a great story on precisely how the domino credit effect can tank everything you've worked for.
Here's a link http://www.cbsnews.com/video/watch/?id=4672315n
Basically, a woman with a FICO of 783 had never been late on any accounts and no recent changes to any accounts. Then credit card company A reduced her credit limit because of the economic downturn. This reduction caused her credit score to drop 50 points instantly. Bank of America holds another of her cards and instantly bumps her 7% interest rate to 28% because of the credit limit reduction.
This is a problem in the way credit reporting agencies operate and the laws that govern them.
December 17, 2008 5:29 PM | Reply | Permalink
Thank you so much for the video - I don't know how I missed this. Her story is very similar to mine...
I hope Biden sucks it up and does the right thing...if the Obama Administration doesn't tackle this because of the Delaware interest I'll be so mad that I voted for him...
December 18, 2008 12:13 AM | Reply | Permalink
I'm confused, though - at the end of the story the reporter mentions that the Fed, et.al., are tightening credit regulations, but I don't think those regulations include balance chasing (although they do target late fees, interest rates and other insane penalties). Did I miss something or am I right in thinking this story is a little misleading?
December 18, 2008 12:28 AM | Reply | Permalink
Is it just a problem or is it racketeering? Having all these independent entities acting in collusion seems somehow sinister to me.
December 18, 2008 3:25 AM | Reply | Permalink
That's a good question - I don't *think* it's racketeering because although they're all doing the same thing I haven't seen anything to suggest that they're colluding. However, I do hope that someone with the ability to do an actual investigation (as opposed to a Google search) is looking into this.
December 18, 2008 9:54 AM | Reply | Permalink
Excellent post. I have a name for what the credit card companied do: penalty-seeking. They attempt to get customers on whom they can profit by imposing penalties. Cell phone companies also are penalty-seekers in a big way. Many health insurers are penalty-seekers as well, but they impose penalties in the form of refusals to pay for care. What all these have in common is that companies attempt to get consumers to sign very complex contracts with very many provisions, so that consumers are likely to violate some of them. When they do, the penalties are extremely disproportionate to the costs borne by the companies due to the 'violation', and the companies make out big. What we really need is a ban on penalty-seeking in general, with a law that says that penalties have to be proportionate to the costs a company bears when a provision is violated. Ban penalty-seeking!
December 17, 2008 10:52 PM | Reply | Permalink
Usury? You guys are against usury? You must be bible thumping fundamentalists.
Seriously, we used to have really harsh usury laws in this country. If I recall, in Minnesota is something like 8%. Of course I never paid a mortgage under 10%.
Usury is such a sly, evil treacherous and alluring figure. It calls you in. It says: You will get that bonus soon and you really need a mixer now.
Your paycheck is coming in three days. It is time for you to celebrate.
You deserve a new suit now, look, it is on sale and it will help you make a better impression and you will make more money.
Of course you need a magnifying glass, an attorney and a cpa to explain what those tiny words mean on THE AGREEMENT.
December 17, 2008 11:24 PM | Reply | Permalink
to a therapist or marriage counselor
Are you fuckin' kidding me? That is so against any kind of thought through public policy.
Hell, all you need to prevent is one *Va. Tech and you're home free for a hundred years of psycho credit card defaulters(the next big plague...!)
*Support Mental Health or I'll Kill You...(as the T-shirt used to say in jest...
December 18, 2008 1:15 AM | Reply | Permalink
Yes, but "in these difficult economic times" credit companies need to prevent folks from defaulting. If you charge marriage counseling sessions they see that (obviously) as marriage trouble. What is the primary cause of marriage trouble? Financial problems. Then there's the question of why you charged the session...could it be because you couldn't afford to write a check? Well, then they have to cut your limit before you go crazy charging more things you can't afford.
The part that burns me is that points cards encourage people to charge everything in order to rack up points - but when people change their charge habits to do collect points (charging gas and groceries usually) the credit companies see that as a red flag and lowers their limits.
Salt in the open wound: they do this even though in many cases the companies have themselves demanded and received billions of dollars in bailout funding.
December 18, 2008 10:01 AM | Reply | Permalink
Salt in the open wound
The whole data mining thing has such huge implications in all kinds of unforeseen ways.
Ultimately, I think (hope??) it will lead to a turning away from hypocrisy (various commercial examples of which you cited) and a general agreement to give each other a fucking break...
That is to say, we as a society could decide that anytime your credit limit is cut (for such and such enumerated reasons) the First National Bank of The First Nation will send you a new card for the difference.
December 18, 2008 11:37 AM | Reply | Permalink
I see that interest rate ceilings are not included.
Very disappointing.
I have been railing for years about how the credit card companies got interest rate ceilings removed.
It was in 1980, when there were high inflation rates. From Wikipedia:
Each state had previously had a pretty reasonable interest rate ceiling. I live in IL, and I believe it was 12% here. I have the vague memory that some states had 10%, some even lower.
At the time, I predicted (even though I didn't know much then, I knew enough to be cynical) that when the inflation rate came down, the credit card companies wouldn't go back and ask for the ceilings to go down. (lol) But I also predicted that Congress would not make any attempt to reinstate ceilings. And, to my knowledge, none ever did.
I recently watched a video of a woman (sorry I don't remember who) who wrote a book about how back in 1970 Americans saved something like 3% of their take home pay and paid about 1/2% in credit card debt. She said that now people pay 5% in credit card debt and save 0%. (These are my approximate numbers, from my recollections from the video.)
With numbers like those, I remember thinking, listening to her talk, it is clear why Americans don't save - what used to go into our savings accounts was going into paying credit cards. But it is not as simple as saying that we don't have any discipline. We, for the most part, pay our credit card bills, so we aren't deadbeats. The important factor is that the interest rates are so much higher that we can't pay 1/2% of our pay and keep up with or get ahead of the interest.
One more factor:
Sixty Minutes a couple of years ago had a segment on the guy who convinced the credit card companies to LOWER the minimum monthly credit card bill payment to 1% of the balance. He convinced them that if they did they would reap (rape?) much more money from the suckers, because the principle would remain high, because the payment would do little more than offset the added interest/"finance fee".
Ever since that show I have tried to pay 5% per month (no matter how much it hurt), and it has helped me to bring my balances way down. In doing so I am paying about what people USED to pay, when interest rates were much lower.
It ain't much, but it takes control away from the credit card companies, at least a little bit. Getting balances low means even high interest rates don't result in a lot of money paid to them as "finance fees". And what we don't pay them is mine.
But they do need to address interest rates at some point. They need to be brought back down to the 10-12% range. High rates were necessary when inflation was 15%; when it is 3-5% a year, it is highway robbery to have 20% and higher.
.
December 18, 2008 1:39 AM | Reply | Permalink
Yeah, the legislation that passed over the summer originally had interest ceilings included but it was removed in order to get the bill passed.
One thing that did pass in that legislation is a requirement to raise minimum payments so that you are forced to pay a little bit of principle. I don't know if you noticed but minimum payments jumped a lot over the summer...and that's a good thing.
December 18, 2008 10:03 AM | Reply | Permalink
You guys are missing the point. I guess if you're one of the people currently paying excessively high fees/interest you're happy about this. But for those of us that don't fall prey to these high rates we will be hurt.
How do you think banks will respond to this? They will start charging annual fees on ALL cards, cut credit limits on ALL cards, etc. This is a bad time to be raising fees on anyone or cutting people's limits
December 18, 2008 7:41 AM | Reply | Permalink
It is simply awesome That's a good question - I don't *think* it's racketeering because although they're all doing the same thing I haven't seen anything to suggest that they're colluding. However, I do hope that someone with the ability to do an actual investigation (as opposed to a Google search) is looking into this. After all this one is truly nice and informative post...
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credit card deals
October 14, 2009 3:28 AM | Reply | Permalink