dcsimg

New Credit Card Rules and Regulations - The Good and The Bad

Published 12/24/08 (Modified 3/8/11)
By MoneyBlueBook

Note: The New Credit Card Rules Do Not Go Into Effect Until July 1, 2010

These days, it seems like whenever there's a good thing going or some attractive opportunity for pecuniary gain or profit, the masses ultimately swarm the offer like locusts until they've completely ruined it for everyone else. This is how I feel about credit cards and the credit card industry. Credit card rewards and interest free balance transfers were once the easiest ways to make some free money on the side, but now that the Feds have enacted the new credit card law, all of that's about to change.

As a big proponent of credit card use and an eager partaker of reward credit cards, balance transfer deals, and credit card arbitrage, I've been taking advantage of all that they've had to offer for some time now. Over many years, I've applied for and been approved for more than 25 credit cards. I've owned, carried, and used most of the major credit cards from Capital One, Bank of America, Citibank, Advanta, Discover Card, to American Express. Throughout college and into adult hood, I've used my squadron of credit cards to earn more than $10,000 worth of cash back rewards, redeemed point rewards for countless free gift cards, and accrued more than $15,000 of interest profit from balance transfer arbitrage. At its peak, I was carrying more than $100,000 in total credit card balances at one time, taking advantage of 0% APR credit card funds deposited into a high yield savings account to earn free interest money.

However, despite my aggressive credit card usage history, I've never paid a single cent in credit card interest, forked over a single late fee, or suffered a major long term FICO credit score hit. Currently, my FICO credit score stands at a very healthy 802, thanks to my solid credit history and lack of any late payments. In fact, I don't even know what any of my credit card interest rates are as I've never had to deal with them before. I have always paid my monthly card balances in full and on time. As a naturally frugal saver, I've always lived within my means and eschewed unnecessary material goods . Since I started using credit cards at the age of 18 and made paying off my regular credit card balances a priority in my life, I've never had to pay anything to the credit card companies, and instead have managed to profit immensely from them.

Because of all this, I had mixed feelings when the federal government finally issued the new credit card rules and announced its plan to crack down on allegations of unfair and deceptive credit card practices by the credit card industry. While the new rules have the potential to benefit American consumers and essentially protect them from their own spending stupidity and consumerism negligence, the new changes are likely to rain on my parade and spell the end to the credit card party I've been enjoying for the past few years. However, despite my personal misgivings and the potential loss of a key cog of my personal finance arsenal, I think the new credit card rules and regulations were probably long overdue. Like the mortgage industry, the credit card sector has been in serious need of a good shakeup for some time. Lax federal oversight and governmental complacency has allowed the industry to get a bit too lax on basic fairness standards, permitting abusive and egregious predatory credit card practices to go unchecked.

Despite the Current Recession, The New Credit Card Law Don't Go Into Effect Until Summer Of 2010

As evidenced by the huge credit bubble that finally popped recently, America has had a love affair with debt and leverage for the last two decades. This abundance of credit in all forms caused many to become drunk with highly leveraged spending power, leading many down the path of out of control shopping, and encouraging the tapping of home equity to pay off credit card balances. The credit card industry's practice of packaging and selling credit card debt to investors and hedge funds encouraged the growth of exorbitant risk penalties, over the credit limit fees, and all sorts of balance transfer and cash advance charges. Driven by the natural pursuit of profits, the credit card issuers eagerly raked in the ever increasing interest charges and late payment fees. Eventually the subprime mortgage crisis destroyed the housing market and in turn caused a chain reaction devastation that led many credit card consumers to no longer be able to handle their credit card payments, leading to a rise in defaults and ballooning non payment scenarios.

Wallowing in their own mismanagement mess and inability to control their spending habits, consumers ultimately turned to the federal government for bailout assistance. After bombarding the Fed with over 65,000 public comments (the highest number ever received by the federal government on any one issue offered up for comments), the Fed finally responded and issued an announcement of its approval of new credit card rules to combat what regulators labeled as unfair or deceptive credit card industry practices.

In its combined action and announcement, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Reserve Board approved the new credit card rules, sending a financial tsunami through the the banking and credit card industry. From here on, it is clear that these new rules will fundamentally rewrite the way future credit cards are packaged, marketed, and priced for consumers and small businesses. Despite the significant moves, some lingering critics remain displeased at the effective date of the new rules - July 1, 2010 - and argue that consumers need the new rules now to protect them from overbearing credit practices already in place in light of the current ongoing economic recession and not wait until mid-2010 when the recession may already be over. Of course, the industry has indicated that it needs the lengthy amount of time to adapt to these newly enacted regulations.

How Will The New Credit Card Rules and Regulations Affect You and Make Your Debt Reduction Life Easier?

1) No More Interest Rate Hikes On Existing Balances - Previously, as was the routine practice by the credit card issuers in recent years, credit card interest rates could be increased and jacked up on a whim with only a short notice to the customer in one of those fine print letters that nobody ever actually reads. With the new credit card regulations, interest rate hikes will not be permitted on existing balances and rate increases will only be allowed under limited circumstances such as on future purchases, new cash advances, when a promotional or introductory rate ends, or in response to an actual late payment in violation of pre-existing card agreements. This is one of the biggest changes and one that I wholeheartedly agree with. However, as one who has always paid off his card balances on time and has never paid late fees or credit card interest charges, my advice to all is to always pay off balances on time and in full to avoid having to even worry about credit card interest rates to begin with.

2) Interest Rates Cannot Be Raised Until A Payment Is Over 30 Days Late - Under the new credit card rules, interest rates for existing balances can only be increased if there is an outstanding payment that is over 30 days late. This change eliminates the old practice of allowing credit card companies to increase or double your current APR interest simply if you run up a large balance on your cards (to force you to pay those balances off quicker than you'd like). In addition under the new rules, card lenders must give cardholders at least 45 days of advance notice in the event of interest rate changes, including rate hikes due to 30 day late payments or non payment penalties. Previously, card issuers frequently gave notice of 15 days or less.

3) No More Universal Default - Credit card companies will not longer be permitted to raise current interest rates on cardholders simply because of their payment history or track record with other unrelated creditors such as landlords, utility companies, or even with different credit card issuers. Previously, universal default essentially allowed card issuers to raise rates arbitrarily by alleging cardholders had universally defaulted on all existing loans simply with a single violation against one unrelated debt account. While many card issuers like JP Morgan Chase have already discontinued this practice, this new rule compels the rest to follow.

4) No More Double Cycle Billing - While the immensely illogical practice of two cycle or double cycle billing is predominantly already a thing of the past with most card issuers having already abandoned this ridiculous practice, the new rules will officially end the loophole. Double cycle billing is the practice of calculating interest on daily card balances from more than just the previous 30 days. This billing practice hurts consumers who pay off their balances in full in one month but not in the next, because it irrationally averages multiple month balances to generate interest fees for credit card companies. Thus cardholders end up getting hit with finance charges and interest fees from the previous billing cycle even though they have paid the bill in full.

5) Card Payments Applied To Higher Interest Rate Balances First - One of the most significant new changes (and perhaps the most important), will help compel the practice of fair allocation of payments - a great future benefit to consumers, particularly those that engage in 0% balance transfer offers, cash advances, or ATM withdrawals that carry different interest rates. Any new payment above the credit card bill minimum must automatically now apply to the part of the balance with the highest interest first. For those who have multiple balances on the same account at different interest rates, this new rule will prohibit card lenders from applying payments towards lower interest balances first before applying them to the higher interest ones. This will stop the seemingly unfair industry wide practice of applying monthly payments to the cheaper credit card balances first, while letting more expensive balances accrue interest charges at higher rates.

6) Longer Payment Grace Periods Of At Least 21 Days - Credit card issuers will be required to offer consumers�� a reasonable amount of time to make payments on monthly credit card bills - at least 21 days after bills are mailed or delivered. This will help protect consumers from shrinking payment periods and give them a reasonable amount of time to make payments before late charges and interest fees are applied. Personally, I don't even know how long my credit card grace periods are as all my cards are set up with automatic bill payment that automatic pulls money from my linked checking account to ensure I never have a late payment. I highly encourage the use of automated debit payments. It makes life easier and much more hassle free.

7) No More Unreasonable Fees For Exceeding Credit Limit Because Of Hold On Account - This addresses a basic fairness problem some cardholders have been experiencing, particularly those who travel a lot. Oftentimes when consumers make reservations for rental cars or hotel rooms, merchants will place a hold for a certain credit limit amount on credit cards as a security deposit beyond the purchase amount. While the security deposit hold is in effect, the card's credit limit is temporarily reduced, making it more likely for the cardholder to accidentally exceed his or her credit limit in the meantime with additional charges and thereby incurring an over the limit charge or fee. The new rules do away with excessive fees in such a scenario.

8) Limitations On Bad Credit Credit Card Fees - This new credit card rule change has the potential to reign in fees for subprime credit cards big time. Subprime credit cards that target people with bad credit will no longer be allowed to charge hefty upfront fees with the new limitations. What was happening was that these subprime credit cards (high interest cards for people with low credit scores with $500 credit limits) were charging applicants with upfront fees that totaled half the credit limit and demanding fee payment in less than a year. The new regulation will severely reign in these fees, but essentially eliminating the future of credit card offers for people with bad credit altogether.

9) Disclosure Of Foreign Currency Transaction Fees - While most people are not aware, international credit card users have had to pay extra fees for credit card transactions charged overseas in foreign currency denominations. While these extra foreign currency fee charges remain perfectly legitimate, the new rules require issuers to clearly list the fees and do a better job of publicizing then to the consumer so that it doesn't come to them as a surprise.�� The disclosure of all fees charged for purchasing goods or services in a foreign currency or for using the credit card outside of the United States will need to be made on a table on credit card applications and marketing solicitations, and not just in tiny fine print when the account is initially opened.

10) Better Overall Disclosure of Credit Card Terms and Conditions -�� The new federal rules will require all credit card terms to be disclosed and marketed more clearly to consumers. Card issuers will need to clearly disclose and provide notice regarding important terms and conditions like payment due dates and times, as well as how interest rates and fees will be applied to those making only minimum payments each month. Some credit card issuers have been sneakily shifting around payment due dates and mandating arbitrary payment times, such as setting cut off times at 1:00 pm or on a weekend or holiday. These rules will prohibit such unreasonable and arbitrary practices. As mentioned above, any change to existing credit card terms will need to be expressly disclosed to the consumer at last 45 days before they take effect.

Goodbye Credit Card Rewards, Introductory Teaser Rates, and 0% Balance Transfer Credit Card Offers

The new credit card regulations issued by the federal government will have a significant negative impact on the credit card industry and the future of credit card use in the United States and elsewhere as issuers re-evaluate their existing business and risk pricing models. Because the new rules will severely restrict the ability of card issuers to modify pre-existing interest rates and card terms in response to changes they perceive as credit risk factors (known as interest rate pre-pricing), it is likely all new credit card interest rates will increase as a result, along with a severe reduction in credit availability. All existing rates in place prior to the effective date of July 1, 2010 will likely go up tremendously as well (even for those with excellent credit history scores). Because the new rules do not mandate a ceiling on how much credit card issuers can actually charge for interest fees or late payments, consumers are likely going to be slapped with even higher rates from hereon. With the credit card industry, it comes down to profitability and redistribution of costs. Because of the new rule changes, credit card issuers are likely going to lose a significant amount of money (more than $10 billion a year) in lost interest payments and fees. Instead of eating up the loss and taking their lumps, they are likely going to pass them onto consumers through stiffer interest rates and less favorable credit card reward terms.

The new regulations will have several unintended but perfectly foreseeable consequences as well, including a severe reduction or complete elimination of popular low interest deals, 0% APR balance transfers, and 0% purchase credit card offers, even for those with very high credit scores. The new rules greatly favor those who are irresponsible with credit card usage and those who were never meant to carry credit cards to begin with, and will punish the prime borrowers by eliminating the vast majority of all cash back credit card offers and interest free promotions. Only time will tell whether all such offers will be eliminated en masse, or whether the industry will be able to find a way to stay profitable and continue to offer purchase and usage incentives for consumers.

Despite the fairness benefits of the new credit card rules, here are some of the ways the changes will negatively affect credit worthy consumers:

  • It will be much more difficult to qualify for credit cards as credit availability in compliance with the new rules will dry up.
  • Substantially higher credit card interest rates overall, even for those with excellent credit scores - primarily to compensate the card issuers for their loss of income under the new rules.
  • No more 12 month zero percent balance transfer offers with no balance transfer fees - likely to be replaced with high balance tranfer fees or low interest credit card offers instead.
  • There will be a signficiant scaleback of credit card rewards, cash back incentives, and frequent flyer airline mile programs for responsible credit card use. Goodbye juicy credit card promotions.
  • Severe reduction or total elimination of bad credit cards, forcing those with poor credit to seek higher credit and riskier options such as payday loans or pay day cash advance.

As always with life, it seems financially responsible individuals such as myself always seem to get the shaft. It's always the bad home mortgage borrowers, bad credit card users, or the irresponsible spenders who ultimately get bailed out by the government - taking all the credit card goodies enjoyed by the responsible credit card consumers with them.

Feed for this Entry

6 Responses to “New Credit Card Rules and Regulations - The Good and The Bad” 

  1. Ashley says:

    That was very nice how you mapped out how the credit card rules and regulations are going to change, but some of the comments you made were a bit unneccesary. Not too long ago I was just like you, with a credit score over 750, until I lost my job-as a result of this I lost my home, and my credit score went down along with 2 on my credit cards. Some situations are completely out of your hands, and for people who go through what I have, the new grace period, and rules like that will help in a time of distress. Unexpectedly losing your job does not make you unresponsible, some situations are completely out of your hands.

  2. Raymond says:

    On the whole, I think the new federal credit card rules being implemented will benefit consumers greatly. My only concern is in regards to the long term ramifications they will cause to an already fragile credit business industry. The reduced profitability will most certainly cause them to drastically pull back on the available credit card reward and balance transfer offers in the market.

    Ashley - in your case, if credit card companies were forced to pull back on their offers and start canceling existing active credit card accounts for account holders with less than perfect credit, don't you think this would hurt you even more in the situation you experienced when you lost your job and home? These new restrictive credit card terms may force the major issuers to start canceling cards and leave struggling consumers with less access to credit than they had before.

  3. awdrifter says:

    I think the new rules are generally good for most consumers. Sure we'll have higher interest rates in general, but it's still better than getting slapped a later charge for arbitrary due date change and other unfair reasons. As for the zero interest offers, most people do not take advantage of the zero percent offers the way that you do (put the money in the bank to earn interest), they just transfer whatever balance they have from another higher interest credit card. So even a lower interest offer (5-6%) will still be attractive. Overall I think these new rules are much needed, and it would've been better if they would've implemented it sooner (like on 1/1/2010 instead of June).

  4. Raymond says:

    Awdrifter,

    You make a very good point about the very real fact that most people do not take advantage of 0% balance transfer credit cards in the arbitrage seeking way that I do. However, I myself have struggled with credit card debt before and greatly appreciated the existence of such offers available to me at the time. They have truly bailed me out of difficult financial jams before. If I had to resort to 5-6% APR offers at the time, I don't think I would have been particularly pleased. A 5-6% offer, as low as it may seem, is still forcing the card consumer to become intertwined into the mires of interest accruing credit card debt. A 0% balance transfer card on the other hand allows the card consumer to stay debt free on an interest level. Certainly the zero percent card holder is carrying a credit card balance that must be repaid ultimately, but at 0%, there is substantially less crushing urgency and immediate arm twisting involved.

    I know I'm probably quite alone on this issue, but I'm glad the new rules aren't being implemented too early. The major credit card issuers need time to adapt and adjust their business and lending practices to compensate for the substantial loss of profits the new rules will cause. It's easy to all gang up on the so-called evil credit card companies and their admittedly shoddy business practices, but I don't think we are fully grasping and realizing the gravity of the potential loss in future consumer credit options when these upcoming restrictive governmental regulations are finally rolled out in 2010.

  5. Jennifer says:

    Raymond-

    You said it. I bought my home in 2004 with 20% down and a 30-yr fixed and have watched my equity go upside down by $70K because of all the irresponsible borrowers and lenders.

    I also have taken advantage of 0% balance transfers w/ no fees, but not to earn interest on the money (great idea! I wish I had thought of it before this! oh well...), only to pay for unexpected large purchases such as auto and home repair over 12 months without interest and working it into my monthly budget instead of drawing on savings. This helped my family immensely so I could keep contributing to my retirement and savings accounts, and earning interest on the savings I already have.

    I just got a notice from Chase yesterday they are raising my 7.99% annual interest rate to 11.24% on my Visa card. At least they haven't instated an annual fee...yet (I currently pay $0). I also have a spotless history with credit and feel punished by these changes. You are not alone.

  6. Ed MUNSTER says:

    Despite how creditworthy folks feel , It is a fact the majority of Americans like myself find themselves in a financial terror due to the lagged economy. Poor credit or financial troubles are not always from spending stupidity and consumerism negligence. There are numerous causes that contribute to the burden of credit and financial troubles, death divorce, job loss and company closures or downsizing. If consumers or myself had the ability to pay off their credit card balances in full each month then we would just pay for all services and materials in cash. We all know that with today's economy this is impossible. Some jobs require you have good credit, but what about if you had no credit, would you get the job? Get the point. Credit seems to be weaved internally in our lives, want it or not, unless I want to live in cardboard box, for these reasons credit companies cannot and should not take advantage of our financial burdens. Too bad for those who claim that all the the new changes are likely to rain on their parade and spell the end to the credit card party but I think that it is about time someone stood up to the credit bullying companies get away with. The causes the new laws and regulations had to be written out, out ways the benefits from partying or parading I may want to do with my credit companies.

Leave a Reply



If you liked this site, please Add To Bookmark and/or Subscribe To A FeedReader

Search this site