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 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.
Most consumers will find these new regulations very beneficial. Consumers have been dissatisfied for years about many practices eliminated with today’s reforms. In the past, credit card companies have been able to raise rates “at any time for any reason” with only 15-days’ notice. Unfortunately for consumers, these changes may not go into effect for another 19 months on July 1, 2010.
Here’s 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 the 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 will 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 significant amount of interest revenue; the timing could not be worse for these financial institutions. Many financial institutions will look to make adjustments to their business model. Consumers may see credit card companies raise fees and interest rates to make the most of this time before July 2010.
Banks and financial institutions are expected 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 may have to raise rates for all customers to cover potential losses for risky customers.
* Reduce intro rate offers for balance transfers. In the last six months, several issuers have reduced intro offers from 12 months to six or three months. They are also increasing the rates from 0% to as high as 3.99%. Nearly every issuer charges a 3% balance transfer fee, and most have eliminated the maximum cap for this fee.