My Opinion on the Feds Proposed Rules on Credit Card Issuers

The Fed has drawn up a set of rules to police behavior by credit card issuers. On the surface, it all looks good. However, there may be some unintended consequences. Here are the proposed rules and my thoughts on the matter.

1. Placing unfair time constraints on payments – While consumers may cheer this, I honestly think this is the most ridiculous thing I’ve come across. In the corporate world, if a company misses a coupon payment on the bond, the bond trustee would immediately act on behalf of the bondholders. Lawsuits will be filed, and the company has to negotiate with creditors if they want to avoid filing chapter 11. If payment was missed due to extraordinary circumstances, the borrower may have to pay a fee to the creditors. Why should consumers be given leeway. The Feds are proposing that payments are not considered late unless we have been given 21 days to make a payment. My experiences so far is that credit card companies will not report late payments to the credit bureaus unless you have been late by 60 days. Well, I guess consumers will benefit as we may not be charged any interest unless we are late by 21 days. I’m really not too sure if that is a good idea.

Unfairly allocating payments among balances with different interest rates. – Presently, when you have transferred a balance on a 0% APR deal and you carry more balance on top of that, the payments that you make above the minimum amount will be used to reduce your balance that is charged the 0% rate. That is how issuers make their money on 0% deals. If you charge more expenses to the card, they will earn that higher interest and you cannot pay it off. Well, under the new Fed proposals, this practice will come to an end. An extra payments above the minimum payment will be used to pay the higher interest balance.

Sounds good? But credit card issuers will suffer. One unintended consequence may be that banks stop offering good 0% APR deals.

Unfairly raising annual percentage rates on outstanding balances. – Under the first proposal, issuers cannot raise your interest rates unless you are late by more than 20 days. This proposal will prohibit issuers from raising your rates just because you miss your mortgage payments. This effectively bans the practice of universal default clause.

On surface this sounds great. However, credit card issuers do have a valid point in that you are a more risky borrower if you miss a payment on another debt obligation. In the corporate world, if a corporation miss one couple on one bond, technically, the company has defaulted – not just on their bond, but on every creditor.

I think another unintended consequence is that credit card issuers will have higher issuing standards and APR will be higher than what it would be without this.

Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account, usually by rental car companies or hotels. – This is long overdue and a wise proposal.

Unfairly computing balances with methods such as “two-cycle billing – I definitely second this proposal. Most people do not understand APR or how to compute their monthly balance. Having 2-cycle methods only add to the confusion.

Unfairly adding security deposits and fees for issuing credit or making credit available – The rules would ban fees that consumed a majority of a new card’s credit limit. Sounds familiar. Yes, sub prime cards! Subprime cards normally charge a one-time application or processing fee, a monthly maintenance fee and high APR. Most will only given you a credit limit of $300. By the time the fees are taken out, a new cardholder only has an initial limit of $100!

One is tempted to think that it is great for sub prime borrowers because all sub prime credit cards charge these ridiculously fees. But having said that the reason they do that is because regular issuers will not even issue cards to sub prime candidates.

Question is what happens if they are forced not to charge these fees. Will these subprime issuers feel that they are compensated for lending to less than desirable candidates? I don’t know the answer to that but time will tell. Another unintended consequences.

Making deceptive offers of credit – Issuers have to state clear what you need achieve the APR or teaser deal that was advertised. This is a great thing because if prevents impulse purchases. If only they would enforce that with cell phone companies or cable companies (with all their pay so little for 6 months but do not tell you what happens after the teaser deal is gone!).

I would certainly like to hear your thoughts on these changes.