Credit Card Regulation–The Latest News

On Tuesday, the Federal Reserve unveiled the latest credit card regulation to arise out of the Credit CARD Act of 2009. The new rules, which come into effect August 22, seek to protect consumers from the worst excesses of card issuers in the areas of rate hikes and penalty fees.

Credit Card Rates–New Rules

Up until now, credit card companies could hike your rates with no explanation, and were under no obligation to review the increase in the future. Under the new rules, they’re obliged to tell you why you’re paying more, and must “re-evaluate” the increase every six months. If they find during a re-evaluation that your credit card rates are no longer “appropriate,” they should, within 45 days, reduce your rates to ones that are.

Some suggest that the new credit card rates rules are disappointing because they’re too vague. Are “re-evaluate” and “appropriate” meaningful in any legal or regulatory sense? By now, pretty much everyone knows that credit card companies find loopholes that give them a way out of any regulation that isn’t airtight.

The jury will be out for some time before we know whether Tuesday’s rate rules are sharp-toothed or all-gum-and-no-bite.

Credit Card Penalty Fees–an Incisor Shows

The second area the Fed addressed was penalty fees levied on credit cards. Last week, the Center for Responsible Lending issued a report that questioned whether the existing fee structure is based as much on consumer default risk as credit card companies like to pretend, and concluded that it “…appears designed to create an illusion of low and proportional fees while instead allowing for hidden price increases.”

The new Fed rules (remember, they don’t apply until August 22) should help here. They say:

Your credit card company cannot charge you a fee of more than $25 unless:

• One of your last six payments was late, in which case your fee may be up to $35 or

• Your credit card company can show that the costs it incurs as a result of late payments justify a higher fee

And they go on to say that you can’t pay more in late fees than the minimum payment that was overdue, nor in over-the-limit fees anything higher than the amount you’ve gone over.

Credit Card Use–Tips for the Comfortably Off

CBS MoneyWatch yesterday gave good advice for best-practice credit card use, although some of it only really applies if you’re financially comfortable. In an excellent article (it must have been good; it quoted the Index Credit Cards site), Linda Stern suggested three rules:

• Don’t carry a balance: credit card rates are high now and–unless you have a fixed-rate card–may well rise

• Never make late payments: they cost you hard cash and hurt your credit score

• Use credit cards rather than debit cards: you get the interest-free period of the billing cycle, and usually receive better rewards

Balance Transfer Credit Cards and Charge Cards

If you are comfortably off, you could consider using a charge card. Charge cards may offer many of the same benefits of a credit card (except the credit), and–if you use it properly–can make sure you never pay a cent in interest.

If clearing your existing credit card balance seems an impossibility, you could always explore balance transfer credit cards. There are some available with a zero percent introductory APR on purchases and balance transfers for 18 months, which could be just the breather you need to eliminate your credit card debt. Most of the balance transfer offers also carry a balance transfer fee usually around three to five percent of each balance transfer with a $5 to $10 minimum. Even if you have to pay a three percent fee to transfer your balance, a balance transfer card may be a good option. There are cards that have an introductory offer of no balance transfer fee, so long as you transfer your balance within a specified time period. So, it may be worth a look to see what is available and compare your options.

Published 06/17/10 (Modified 03/25/13)