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Expedited CARD Reform for Consumers Act of 2009

by Smithee on November 6, 2009

in Credit

After the Credit CARD Act of 2009 was signed into law, we saw how credit card issuers started making life tougher for their customers. In short, banks were levying fees on their customers indiscriminately, affecting both the good and the bad.

This has been going on for months. Lawmakers have publicly condemned it, and made requests to the federal reserve, but all to no avail. This week, however, an amendment to expedite the Credit CARD Act (giving it an effective date of December 1st) has passed the House of Representatives in a better-than-average bipartisan manner (only 53% of Republicans opposed it), and I’m hopeful for all of our sakes that a similar measure quickly passes in the Senate.

I read through the words in both versions, and found a few differences, which might make it take longer to work through Congress:

In the House

The House version (full text) makes an exception for depository institutions (banks) with fewer than two million credit cards in circulation. It also comes with various clarifications to make sure that the new law doesn’t apply to banks and creditors who haven’t punished their customers (many of whom continued to pay on time and remain in good standing) in advance of the new law.

It also includes new features starting at Section 6 which state that:

  • if you receive notice of a new fee, and you pay off your balance in full, or cancel your account, that won’t negatively impact your credit score
  • there will be a nine-month moratorium on rate increases with a start date of the enactment of the Credit CARD Act of 2009

If these amendments pass, the moratorium would start December 1, 2009, instead of nine months after the law was passed, on about February 22, 2010.

In the Senate

The Senate version (full text) includes no additional clarifications or amendments, only a date change to December 1.

Flexo and I don’t agree on everything (if everybody did, life sure would be boring), but we agree that Congress should pass each idea into law based on its own merits, and not bundle them together into a jumbled mess of unrelated ideas. In this case, if you want to expedite a law, then document the new date and move on. Now’s probably not the time to be adding new regulations.

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Discover Card Overhauls Their Credit Card Terms

by Flexo on August 24, 2009

in Credit

Now that regulations established by the Credit CARD Act and related rules by the Federal Reserve have begun to take effect, I’ve started receiving notices from card issuers regarding my accounts. My Discover Miles Card was opened in 2005 to attempt a 0% balance transfer, a way to earn interest on someone else’s money for free, but the move failed when MBNA denied the transfer and has gone almost completely unused since that event.

Nevertheless, Discover continues sending notifications of terms changes, balance transfer checks, and new cards requiring activation, all to encourage me to use their service. I received one from Discover today, even though I haven’t used my Discover Miles Card in several years.

Here is the summary of the changes.

  • Discover will no longer increase the interest rate on existing balances if I pay late or exceed my credit limit, but the interest rate on new purchases may increase to a Default Rate if I miss a payment.
  • The card is moving from a “fixed” interest rate to a higher variable rate for purchases: the Prime Rate + 9.74%.
  • The same is true for cash advances. The new variable rate for these transactions is Prime rate + 20.74%. (Yikes!)
  • The credit card company is using the grace period differently. They will not use new purchases to calculate the amount of interest due as long as I pay my credit card bills on time.

The notification included four pages on fine print, but none of these changes will affect me personally unless I need to use this credit card. I expect my other credit card issuers will send similar notifications soon, but even the new regulations for the cards I use will not affect me much because I charge only what I can pay off by the time the bill is due and pay off my entire balance at that point.

There is always a possibility that I experience a severe emergency for which I have insufficient cash. If for some reason I do need to carry a balance from one month to the next, I would prefer to fully understand the many ways in which I will be punished by the credit card industry.

The improvement of the grace period and the elimination of double-cycle billing are two aspects of the new credit card regulations that benefit consumers. Some of these changes, such as the elimination of double-cycle billing, won’t go into effect until February 2010.

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OCC Requiring Credit Cards to Report all Interest Rate Increases in 2009

by Flexo on August 5, 2009

in Credit

The Office of the Comptroller of the Currency (OCC), a governmental regulatory organization feeling the pressure with the White House proposing replacing many of their duties with a new consumer-oriented regulatory body, has sent out a warning to the CEOs of all national banks. The Credit CARD Act of 2009 requires credit card issuers who raise a customer’s interest rate to abide by a number of regulations.

These regulations, such as the requirement to reassess the rates for anyone whose rate increased since January 1, 2009 and for the bank to provide a specific reason for any rate increase, don’t take effect until August 10, 2010. The OCC’s warning is designed to remind credit card issuers that although the rules don’t change until a year from now, they will be in effect for any customer who has been effected since January 1, 2009 — before the Act became a law. The banks will need to maintain these records so they will be available when the regulators come calling next year.

Read the OCC’s letter to CEOs of national banks.

Unfortunately, I am unaware whether my credit cards have increased their interest rates. It has been a long time since I’ve used a credit card to pay for something I could not pay back by the date the credit card payment was due. But I consider myself lucky and thankful to be in that position.

Has your interest rate increased this year?

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10 Purchases That Can Harm Your Credit

by Flexo on July 10, 2009

in Credit

Do you live your life as if everything you do could be made public? I once heard a suggestion that you should judge every decision you make based on whether you would like to see this decision on the front page of the New York Times. That is a good theory, but I can’t say I fully live by this philosophy.

Regardless of the life decisions I make, my purchase decisions are being recorded and analyzed. Almost all of my spending, particularly my major spending, is accomplished through a credit card. I only buy what I can afford and I pay the bill in full every month, but the fact I don’t enter debt or pay interest fees is besides the point.

Based on the places I shop, credit card companies may decide that, based on studies and calculations of the American consuming public en masse, I have become a riskier consumer. If I shop at Some Discount Store, and the algorithms show that people who shop at Some Discount Store are more likely to miss payments or default on a loan, the credit card companies can increase my rates or lower my credit limit. They can change the terms of my credit agreement without missing a payment, exceeding my credit limit, or using a higher percentage of my available credit. Yes, the credit card companies can decide to categorize me in a lower “credit class” based on where I shop. The Credit CARD Act of 2009 doesn’t change this possibility.

If the credit card companies decide to place me in a lower class of consumer, they could increase my interest rates or lower my credit limit. With less credit available, my credit score could be negatively affected. A lower credit score could then have significant financial consequences; I may not qualify for as low as an interest rate on a mortgage than I would have otherwise.

So if you are concerned more about what the credit card companies think of you than you are about what your friends and family think of you, avoid raising a red flag with your banks by choosing cash for these ten purchases. These were suggested by Marketplace.

1. Traffic tickets. If you are more likely to speed and get caught, and to pay for your ticket or court fees with credit, you are a bigger credit risk. Because people who pay for tickets on their credit card tend to default on their payments more often, the credit cards may place you in a lower category of borrowers.

2. Retreading your tires. If you choose to retread rather than replace tires, credit card companies assume you do not have the money to properly maintain your possessions. And if the issuers believe you have less money than you may have indicated when you applied for the card, they might choose to reduce your benefits.

3. Bargain stores. Marketplace points out that American Express has been accused of lowering customers’ credit limits just for shopping at Wal-Mart. That sounds like class discrimination disguised as risk management, but the issuers argue that a change in shopping behavior in a direction of bargain stores indicates concern about money, and if that concern is legitimate, a job loss might be on the horizon. Following the thread, unemployed consumers are more likely to cause a problem for credit card companies.

4. Porn. While the Marketplace article says adult entertainment is simply considered escapism, and those who wish to “escape” may do so due to financial conditions, it seems more likely that credit card simply find consumers of porn to be riskier than others. I wonder if there is any distinction between local strip clubs and high-class escort establishments.

5. Marriage counseling and therapy. If your relationship is on the rocks, divorce might be imminent. Divorce brings on financial problems of its own, such as increased debt and even bankruptcy. The credit card companies will want to cover the possibility of future losses if they believe you are likely to go through a divorce.

6. Lottery tickets. Considered a tax on the poor, lottery tickets are purchased overwhelmingly by people without much money; perhaps winning the jackpot is seen as the only way for people who may not have been given the opportunities of the middle class, or those who had the opportunity to succeed but did not take advantage of them for whatever reason, to build a successful life. Credit card companies see lottery ticket purchases as acts of desperation, and those who are desperate are greater credit risks.

I must confess that when a co-worker goes from cubicle to cubicle, collecting a dollar from each of us to play in the large-jackpot lottery, I still contribute most of the time — not in an act of blind hope but in an act of being social. My coworker doesn’t accept credit cards, though, so I stay out of the banks’ radars.

7. Cash advances. Many years ago, I did take a cash advance. This was before I knew much of anything about personal finance. I had no emergency fund and I left my low-earning non-profit job without a concrete plan. I just needed a few hundred dollars to get me by for a little bit, and I paid it back quickly. But the credit card issuer could have used this event to lower my limit, increase my interest rate, and lower my credit score.

8. Personal pampering. Marketplace suggests women refrain from charging visits to the spa on the credit card if they haven’t established a history of doing so previously.

9. Income taxes. the IRS allows you to pay your income tax bill via credit card. In fact, many people have recommended doing so if you have the cash to pay the bill in full when it comes due and if you can earn cash back or other valuable rewards by paying a large amount of money through credit. But a credit card company may interpret this method of payment as a sign that you can’t handle your financial responsibilities and may penalize you to prevent a larger loss if you default.

10. Alcohol. Drowning your financial sorrows at the bar? That is what the credit card issuers are likely to think if you start using your credit card in bars and liquor stores. Start making a habit of visiting bars and charging the drinks and you may raise a red flag.

While it’s unlikely that some Chase employee is poring over your credit card statement marking demerits for your porn, booze, gambling and spa vacations, the credit card companies have algorithms that detect these patterns automatically. Effectively, a computer program is making the “decision” that could result in you paying thousands of dollars more for your mortgage than if you just paid cash for these certain products and activities.

10 purchases not to put on credit cards, Marketplace, July 8, 2009

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Credit Card Issuers Making Life Tough For Consumers

by Flexo on July 2, 2009

in Credit

Whether due to the economy or the impending regulation enacted within the Credit CARD Act of 2009, credit card companies are taking the opportunity to raise interest rates and minimum payments. This is perhaps an unintended consequence of increasing regulation. These changes affect consumers with manageable debt, but others who are trying to get out of debt or living paycheck-to-paycheck are harder hit by these changes.

Issuers’ actions come as a growing number of consumers lose their jobs and default in record numbers on their credit card debt. The industry is also preparing for restrictions to take effect in February 2010… The banking industry says Congress has no one to blame but itself for higher rates and fees because banks had predicted that restrictions on pricing would lead to higher costs for everyone…

Yet some critics say that issuers are taking advantage of a loophole in the law to bolster their financial conditions… In a statement Monday, [Senator Charles] Schumer slammed issuers for trying to “wring more dollars out of their customers.” Some of the changes in card terms, Schumer says, are “against the spirit of the law and … just plain wrong.”

Is credit card reform — the Credit CARD Act of 2009 (Credit Cardholders’ Bill of Rights) — a mistake or are issuers just using the fear of losing future profits as an excuse for bilking customers now?

Consumers hit again as some banks raise credit rates, fees, Kathy Chu, USA Today, June 30, 2009

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Congress Passes Credit CARD Act of 2009, Now What?

by Flexo on May 21, 2009

in Credit

Yesterday, the House of Representatives voted on and passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, the Senate’s alternative to the Credit Cardholders’ Bill of Rights. Here are some of the provisions, taking effect in February 2010:

Credit card companies must give 45 days notice before raising interest rates. Under current rules, a credit card company can raise interest rates on a customer for any reason at any time with no notice. Normally, the cardholder can refuse the rate increase and close the account, and the issuer will provide a chance for the customer to pay down the balance. The new bill, once signed into law and put into effect, will require advance notice.

Credit card companies must apply your payments to your highest interest rate balance first. Let’s say you took advantage of a 0% balance transfer offer for $10,000 but ended up needing to use the credit card for an emergency and made a $2,000 purchase at an interest rate of 10.99%. Currently, any payment you make is likely to be applied to your balance transfer until you pay off the $10,000, forcing you to be charged interest on your $2,000 balance. The new rules would change this practice.

Minors will not be able to own their own credit cards. Anyone under the age of 21 requires a parent or legal guardian to be the main account holder. The child or student could then be an authorized user on the account. There is an exception for students who have income and can prove they can be responsible for the charges on their own. Currently, my cat could get a credit card. He’s only twelve years old.

Consumers will need to “opt in” to charge above their credit limit. In the “good old days” of credit cards, if you charged more than the level of credit the issuer decided to grant you, your purchase would be declined, the waiter would return to your table, embarrass you in front of your friends, and cut your card in half with a pair of scissors. These days, you are allowed to go over your limit, but you will be charged a fee for doing so.

Credit card issuers claim this is a service; they would be mortified if one of their customers would be forced to live without air conditioning in the dark because the payment via credit card for the electric bill didn’t go through. Under the new law, consumers would have to “opt in” to receive the benefit of being charged a fee. In any situation, it helps to monitor your usage so you know when you are approaching the limit.

Your existing balance will not be subject to “universal default.” Today, it’s common practice for many credit card issuers to automatically raise interest rates if you are over 30 days late, or default, on a debt payment to anyone else who reports to agencies like Equifax and Experian. If this happens to you, you may find your interest rate to be increased on your full balance. The new law does not outlaw universal default, but it does prevent old balances from being affected. Only new charges will be able to be assigned a default rate.

Anticipating and fearing the future expense of these changes, some credit card issuers have already begun raising interest rates, lowering limits, and reducing rewards across the board. Many people I’ve spoken to, and some who have commented on Consumerism Commentary, are concerned that well-behaved credit card users who pay their bills in full each month and reap the rewards will have trouble finding amazing credit card deals in the future. I’m not too concerned.

The glut of rewards in the past decade is an anomaly. The game of credit card arbitrage, moving balances around from one card to another to take advantage of 0% interest rates while your borrowed money is earning high interest in a bank account, has always been dangerous, and in the end, a losing proposition. The ubiquity of these deals has significantly decreased over the past few years, anyway.

Credit is flowing better than it was six months ago. Yes, there are still people out there having difficulty obtaining loans, but for the well-qualified, like those who pay in full and are responsible, won’t find much trouble with credit card offers.

Credit card companies will still be competitive. They’re not going to drop their rewards programs. Even if they’re not making money on interest fees and late charges, they are making up to 3%, sometimes more, on every regular transaction through merchant fees, and the value of rewards that come back to the consumer is usually less than 1%. Credit card users who seek rewards, like me, charge more on their credit cards, so the issuers make more money on us than we’d like to believe.

Personal responsibility is an important lesson that should be learned prior to opening a credit card account. Paying attention to your own finances may alleviate 80% of the headaches pertaining to credit cards. But as customers get savvier, the industry finds ways to make dealing with them more difficult for the issuer, hiding rules deep in the twenty-page pamphlet of fine print and changing those rules on a whim.

I expect that credit card issuers will continue finding new ways to make money off of customers who either don’t pay attention to their finances or find themselves in financial distress due to external or unforeseen circumstances, and I expect that responsible users will continue to find moderate and reasonable rewards for good credit behavior.

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