Saturday, 26 September 2009

• More Thoughts On The Credit Card Act

  
  

  A recent post on Dollarish about a proposal to move up the effective date of the Credit Card Accountability, Responsibility and Disclosure Act asked for commentary on the proposal.  The question at the bottom asked the following questions.

  Are you looking forward seeing changes in how credit card companies do business? How much is credit going to factor in to your holiday shopping?

  The article attached with the post was not written to discuss the merits of the Credit Card Accountability, Responsibility and Disclosure Act, and so I went in search of a more appropriate article to answer the first question.  After unsuccessful searches for better articles I encountered on this topic in the past, I was forced to settle with this article. To be fair, it was used previously on Dollarish in this post but in a different manner.

  The bolded points are from the article, what follows is my commentary.  Some key components of the bill include: 
  

  1.       Protection from arbitrary rate increases

  The new standard requires companies to provide a minimum of 45 days notice on interest rate increases.  This also requires promotional APRs to last at least 6 months.  This was designed to give consumers the option to cancel the card and pay off the balance (at the old rate), or accept the new interest rate.  Read the fine print though, because use of the credit card after notification is considered acceptance of the new terms which means you have to pay off the balance at the increased rate.  I only think this provision will be effective if it is combined with the “plain english” provision.  Chances are this notice is going to be included with a new cardholder agreement, with the font size in comparison with all the other notices and terms that the company has to include in order for it to be a legally sound agreement, I don’t see the notice being anymore prominent than the standard disclosures, which means many will pass over it.  For the common citizen to take notice, I think it will have to be stated somewhere on the card statement saying specifically that it will change and list the old and new rate.  Otherwise, I see this notice being just like the cardholder agreements few people read and even fewer take note of the differences.

        

  2.       The right to have rates reviewed and reduced

  Currently, companies don’t actively review accounts to determine if a reduction is warranted, they actively review accounts to determine if an interest rate requires increasing.  This provision requires companies to review accounts to determine if the interest rate fits the credit risk every six months.  If the interest rate is too high, the consumer can have it reduced. This is basically a risk vs. reward situation for companies.  They need to actively review their accounts to account for added risk to remain profitable, and rate decreases don’t have a risk associated with not adjusting them, they are actually rewarded by it with additional interest revenue.  What corporation in their right mind will expend resources to reduce revenues?  Here’s the simple answer, only those required by law.  Overall this is a definite positive for consumers, but I would be careful for increased fees elsewhere because the companies are losing revenues and increasing costs, not a position any company wants to be in.

   

  3.       Fair allocation of payments

  This provision requires companies to apply payments to balances with the highest interest rate first.  This will undoubtedly help those in serious trouble with debt get out a little quicker because it will result in a lower interest being paid.  In the past, many credit card companies applied payments towards the lowest interest rate balance first, which meant that the remaining balance had a higher interest rate attached to it.  There are several instances where there can be multiple interest rates, such as balance transfers, cash advances, etc.  This is a strong point for consumers that have one of these situations, but for the common consumer, it isn’t much help.

   

  4.       No universal default

  To understand this, you need to know what a universal default means.  In the past, companies could raise interest rates to the default rate (the maximum rate) if you defaulted on a separate credit card from a different company.  The new provision only allows the credit card company to increase the rate to the default rate based off of the payment history of their card.  Once again this provides support primarily for those in serious troubles, if you never default, then this rule doesn’t affect you.

   

  5.       No double-cycle billing

  This refers to how finance charges are assigned, some have flat fees, and others have percentages.  In the past, companies have been able to consider both current and previous billing cycles in the computation, regardless of full payments of the previous balance.  This results in higher fees for the consumer.  Take note that this affects everyone with credit cards, even those who pay their balances off each month, not just those in credit card debt.

   

  6.       No fees for paying your bill

  Some companies, in order to discourage phone payments in favor of mail or online payments, have a surcharge for payments by phone.  This has been eliminated.  However, expedited service can still have a surcharge.  Chances are most people don’t make many phone payments, why would a reasonable person pay a surcharge when they can just as easily mail it or go online.  I don’t see this change doing much good for the consumer, which is probably a good thing, if this was a popular method, then it would result in more outsourced call centers and additional costs to credit card companies that would have been passed on to consumers.

   

  7.       Protection from due date gimmicks

  Currently banks choose when the cutoff on the due date is, this sets a date for 5 P.M. EST on the due date, making it a concrete end time.  Simple change, however I believe it should be 5 p.m. on the local time zone, makes things simpler for the consumer, but probably more difficult for the company.

   

  8.       Enough time to pay your bill

  The timeframe from when you receive your statement notification is being expanded from 14 days to 21 days, providing additional time to make a payment.  Good for everyone that owns a credit card.

   

  9.       Education on dangers of minimum payments

  “Currently, issuers do not educate cardholders that how they pay off their balances (i.e. minimum balance vs. full balance) affects their financial standing in the long run. The new laws would require quarterly reports that disclose the time and interest costs to pay off credit card balances, if the consumer only pays the required minimum.”

   

  New regulation requires credit card issuers to educate cardholders on the long term effects of paying the minimum balance as opposed to the full balance.  Specifically it requires issuers to provide the cardholder quarterly reports that disclose both the amount of time and the interest cost of paying off the balance by paying the minimum balance.  Personally, I think this is an added expense that is being thrown at issuers that is the cardholder’s personal responsibility.  I would much rather see the issuer put an example of the time and money spent for full payment vs. minimum payment on their website.  I think a review/quiz system similar to student financial aid exit surveys as a requirement before opening a new account would serve the purpose of educating and be more cost effective than quarterly statements.   If this was the case, cardholders can’t claim they didn’t know the benefits of full payment and forces consumer education without excessive costs to card issuers.

   

  10.       Protection of young cardholders

  “In the past, young cardholders were drawn into attractive introductory offers only to find that they are unable to pay off their bills. Now those under 21 can only get a credit card in two ways: (1) have a qualified co-signer, or (2) prove they have the ability to repay their credit card. In addition, issuers will no longer be able to offer tangible gifts on college campuses. Finally, issuers offering college-specific cards will have to report their contracts with universities regularly for federal government review.”

   

  Card companies target young people and students with low introductory offers.  Often these young people find themselves unable to manage the debt.  The new law states that those under 21 need to meet one of two requirements in order to qualify for a credit card.

  1)       Have a qualified co-signer

  2)       Prove repayment ability

  Also issuers can no longer offer tangible gifts on college campuses.  Issuers offering college-specific cards must submit contracts to the federal government for review.  I believe that this protection can help prevent a lot of mistakes that young people make, but also may harm students attempting to build credit responsibly.  I admit, when I was that age, my credit limit was beyond what I required, but I managed my credit responsibly.  By all accounts proving repayment ability sounds like a really good idea, a really good idea for everyone attempting to get a credit card, not just those under 21.  This makes me wonder why any age is attached to this protection at all.  I don’t want to call age based discrimination, but I think it is riding a fine line.  What I would like to see implemented as a protection for young people is financial education at the high school level.

  **Not included in the article, but in the CARD Act-“Plain English language”

  This provision is designed to try to simplify the complex language that is found in credit agreements and statements.  It also is trying to eliminate some of the fine print that often gets ignored by cardholders.  Translation, not the fine print we all know and hate, but I don’t see the font size being over size 8.  Let’s be realistic here, there will undoubtedly be fine print included.  To put these documents in plain English without using much fine print, will probably result in a much thicker document that isn’t as easy  to read as the bill hopes for.  The difficulty with trying to simplify language is that everyday language doesn’t hold up legally nor does it completely cover the topic.  Trying to explain a very technical topic to someone with no background in it is very difficult to do.  It requires education on behalf of the uninformed and patience on behalf of the explainer.

  
  

  What do you see as the pros or cons of the act?
  

  **Not included in the article, but in the CARD Act-“Gun laws”

  That’s right, Gun laws, in this bill is included the right to carry legally owned firearms in national parks and nature preserves.

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