How Federal Reserve's Changes Affect Credit Card Industry
Today, the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration passed large and significant regulations for the credit card industry. These regulations will put limits on interest rates, how payments are applied and restrictions on penalties for subprime cards.
"These new regulations are great news for most consumers," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Consumers have complained for years about many of these practices that are being eliminated with today's reforms. It has always been extremely unfair that credit card companies were able to raise rates 'at any time for any reason' with only a 15 day notice. Or how they could apply the payment to the lowest interest rate while milking interest on the highest interest rate for as long as possible. It is just unfortunate that these changes may not go into effect for another 19 months on July 1, 2010."
How the regulations will affect cardholders:
* Save money in interest payments by paying off highest balances faster. The issuers currently apply any payment above the "minimum" to the balance with the lowest interest rate. This means higher interest payments for cardholders. Regulations will require issuers to apply payment to highest interest rate or proportionally to all balances.
* Have time to react and adjust to changes in terms and conditions. Currently the issuer can change the terms of your card with a short 15-day notice. The regulations increase the notice to 45 days
* More time to make a payment. Regulations will require a reasonable time, 21 days, to pay your bill.
* Cardholders will know when to expect a rate increase. Issuers may increase rates at the end of a specified period, providing the rate increase was disclosed at the opening of the account.
These new regulations also prohibit:
* Unfairly computing balances with two-cycle billing
* Unfairly adding security deposits and fees for issuing credit or making it available.
* Excessive fees for sub prime cards. The fee will be capped at 50% of the credit limit and allow cardholders to pay off initial balance over a year. Fees exceeding 25% must be spread over no less than six months rather than charged as a lump sum.
"By eliminating the issuer's ability to raise rates at 'any time for any reason,' these regulations force banks to give up a lot of interest revenue and the timing couldn't be worse for these financial institutions. They are going to have to make adjustments to their own business model. I wouldn't be surprised to see them raise a few fees and interest rates to make the most of this time before July 2010," says Hardekopf. "People who have recently received a large rate increase are asking if this will be retroactive and benefit them. I don't think it will be retroactive."
Expect banks and financial institutions to respond by:
* Reducing the availability of credit. They may accept fewer application for credit cards. It will be much more difficult for those with poor credit to qualify for a credit card.
* Limit their exposure to risk with lower credit limits and higher interest rates. "The banks are saying that they may have to raise rates for everyone to cover potential losses for risky customers," says Hardekopf.
* Reduce intro rate offers for balance transfers. "In the last six months, we have seen several issuers reduce intro offers from twelve months to six or three months. They are also increasing the rates from 0% to as high as 3.99%," says Hardekopf. "Nearly every issuer charges a 3% balance transfer fee and most have eliminated the maximum cap for this fee."
"These new regulations are great news for most consumers," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Consumers have complained for years about many of these practices that are being eliminated with today's reforms. It has always been extremely unfair that credit card companies were able to raise rates 'at any time for any reason' with only a 15 day notice. Or how they could apply the payment to the lowest interest rate while milking interest on the highest interest rate for as long as possible. It is just unfortunate that these changes may not go into effect for another 19 months on July 1, 2010."
How the regulations will affect cardholders:
* Save money in interest payments by paying off highest balances faster. The issuers currently apply any payment above the "minimum" to the balance with the lowest interest rate. This means higher interest payments for cardholders. Regulations will require issuers to apply payment to highest interest rate or proportionally to all balances.
* Have time to react and adjust to changes in terms and conditions. Currently the issuer can change the terms of your card with a short 15-day notice. The regulations increase the notice to 45 days
* More time to make a payment. Regulations will require a reasonable time, 21 days, to pay your bill.
* Cardholders will know when to expect a rate increase. Issuers may increase rates at the end of a specified period, providing the rate increase was disclosed at the opening of the account.
These new regulations also prohibit:
* Unfairly computing balances with two-cycle billing
* Unfairly adding security deposits and fees for issuing credit or making it available.
* Excessive fees for sub prime cards. The fee will be capped at 50% of the credit limit and allow cardholders to pay off initial balance over a year. Fees exceeding 25% must be spread over no less than six months rather than charged as a lump sum.
"By eliminating the issuer's ability to raise rates at 'any time for any reason,' these regulations force banks to give up a lot of interest revenue and the timing couldn't be worse for these financial institutions. They are going to have to make adjustments to their own business model. I wouldn't be surprised to see them raise a few fees and interest rates to make the most of this time before July 2010," says Hardekopf. "People who have recently received a large rate increase are asking if this will be retroactive and benefit them. I don't think it will be retroactive."
Expect banks and financial institutions to respond by:
* Reducing the availability of credit. They may accept fewer application for credit cards. It will be much more difficult for those with poor credit to qualify for a credit card.
* Limit their exposure to risk with lower credit limits and higher interest rates. "The banks are saying that they may have to raise rates for everyone to cover potential losses for risky customers," says Hardekopf.
* Reduce intro rate offers for balance transfers. "In the last six months, we have seen several issuers reduce intro offers from twelve months to six or three months. They are also increasing the rates from 0% to as high as 3.99%," says Hardekopf. "Nearly every issuer charges a 3% balance transfer fee and most have eliminated the maximum cap for this fee."
