Federal Reserve proposes to curb certain abusive credit card practices
by Steve Cypher on Monday, May 12th, 2008After years of hearing complaints from consumers regarding abusive practices by credit card companies, the Federal Reserve has proposed some initial rules to curb some credit card lending practices.
The difference between a car loan and a credit card
Here at Auto Credit Express, we’ve always felt that the informed consumer is our best customer. In addition, it has always been our contention that in order to re-establish credit, customers must be treated fairly – both by the car dealers they buy their vehicles from and the banks they are financed through. In this regard, a bad credit car loan is a much fairer way to raise a credit score, since the finance rate is fixed at the time the car is purchased. Credit card companies, on the other hand, have always been able to raise their interest rates at any time and for reasons other than being late or missing a payment. Proposed changes by the Federal Reserve will curb some of these practices.
How the proposal will affect credit card holders and bad credit customers
The proposed changes by the Federal Reserve were drafted with the cooperation of two other Federal agencies – the Office of Thrift Supervision and the National Credit Union Administration. Here are the practices that would be restricted:
• Retroactive interest rate increases – The proposal would prohibit the practice of charging higher interest rates on balances incurred before a rate increase went into effect, unless the cardholder is more than 30 days late on a payment. Although it wouldn’t prohibit credit card companies from raising rates because of a problem with another creditor, or a drop in the cardholder’s FICO score, it would prohibit issuers from applying the higher rate on existing charges.
• Fairer allocation of payments – When cardholders transfer balances at low introductory “teaser” rates (on cards that have higher rates for new purchases), issuers would be required to apply any payments to the higher rate debt first.
• Forbid “double cycle billing” – This would prevent credit card companies from charging interest on any debt that was paid during the “grace period” of the previous month’s billing.
• Forbid excessive fees for bad credit cards – It would prevent credit card companies that target consumers with bad credit histories from charging fees that amount to more than half of the credit being offered. If the fees being charged amounted to more than 25% of the credit line, customers would be allowed to pay these fees over a one year period.
According to the Consumer Federation of America, Congress is also considering a number of changes that would address aspects of the credit card industry that aren’t included in the Fed’s proposals:
• Aggressive lending to young consumers - Requiring credit card companies to consider the ability of consumers under the age of 21 to repay the loans they are offered and allowing them to affirmatively choose whether to receive credit card solicitations.
• Excessive and growing penalty fees - Requiring that penalty fees be reasonably related to the costs that credit card issuers incur because of a late or over-limit transgression.
• Outrageous interest rate hikes - Limiting “penalty” interest rate increases to 7 percent above the previous rate if the consumer fails, for instance, to make a payment on time, or imposing penalty rate increases only on future purchases.
• Repeat over-limit fees - Allowing over-limit fees to be charged only once, unless additional charges increase balances above the account limit.
• Fees for paying a bill - Prohibiting card issuers from charging a fee to allow consumers to pay a bill by telephone, on the internet or by mail.
• Unilateral changes in terms - Prohibiting card issuers from altering credit card agreements while they are in force without specific written consent from the cardholder.
