When President Obama signed the Credit Card Bill of Rights last May he signaled a new era in how banks do business. The final law was a compromise between the House bill and the stricter Senate version and is designed to change the way credit card companies bill their customers.
Heralded as a win for the consumer, the Act will best serve those consumers who manage their credit cards responsibly. However the law does not go into effect until February 2010 which gives the banks an opportunity to maximize their current billing strategy. Considering that last year Americans paid over $11 billion dollars in fees (not interest rates) and that the new law is going to greatly restrict the billing practices that generated those fees, the banks have to scramble to come up with new revenue streams. Here's how the law affects consumers and banks:
Increases in interest rates cannot be applied to existing balances. This means that when banks announce a new increased rate on a consumers's account, it can only apply on purchases and transactions going forward. Rate increases can not be applied to balances already on the account. This represents one of the banks' major source of revenue.
Double Cycle Billing will be a thing of the past. The bill strictly forbids charging interest on a balance that has been previously paid. Currently banks compute interest base on the last 2 months of billing even if the previous month had been paid in full. The new bill prohibits this practice.
The practice of charging over the limit fees will end. Accepting charges that put the consumer over their credit limit and then charging an over the limit fee will not be allowed unless the consumer opts in on a over the limit program sponsored byt the card. If a customer's purchase puts him over the limit, the charge will simply be disappoved.
Payments will be applied to the highest interest rate first. That amount paid by the consumer that is above the minimum payment due, will be applied to the highest rate in the account rather than the lowest rate which is now the practice of the credit cards.
No fee for paying your credit card bill. Many credit card issuers are charging a fee if the consumer pays his bill in any manner other than mail. It will no longer be allowed to charge for payment by phone, online or electronic transfer. Further, the bill must be in the consumer's hand not less than 21 days before it is due.
College students will have a tougher time getting a card. Anyone under 21 will have to show they have the ability to pay back their credit card charges. The days of easy credit for kiddies and college students are over. Minors may be issued a card without a source of income if their parents co-sign the agreement.
Not surprisingly, the credit card industry is predicting difficulties in the American credit system as a result of this new law. Being for profit organizations, they have no choice but to find new ways to make money of their services to replace that money that will no longer be available as a consequence of the new regulation. Here's what they see in the future:
A return of card fees. Currently only 20% of the card issuers require a fee to open and keep the account. Industry experts are predicting a return to this practice with card fees running between $50 and $100 per year.
Tightening of credit. Banks have suffered their biggest default rates ever, and as a result predict it will become ever more difficult to qualify for credit and limits will be significantly lower. (Editor's note: Does this mean they will only issue cards to people that have demonstrated they can handle credit responsibly rather than mass market to anyone who is breathing? DUH)
Goodbye frequent flier programs Reward programs typically cost the banks 1% of the balance of the account. Expect this plans to be scaled back or eliminated all together. The same will apply for the cash back offers.
Higher check and balance transfer feesBank of America and Discover are already contemplating increasing their fees for balance transfers. Banks anticipate a flurry of transfers to lower interest accounts and this is another way to pick up revenue.
Consumers can expect to see more bad news between now and when the law kicks in. Predictions are for a rash of interest rate increases and a reduction of existing credit limits. In the long run, this new law will best benefit people with excellent credit as every bank will be trying to attract them. The average consumer, unless they can quickly pay off their existing balances, will likely watch their balances grow as new increases hit both new purchases and existing balances.
Heralded as a win for the consumer, the Act will best serve those consumers who manage their credit cards responsibly. However the law does not go into effect until February 2010 which gives the banks an opportunity to maximize their current billing strategy. Considering that last year Americans paid over $11 billion dollars in fees (not interest rates) and that the new law is going to greatly restrict the billing practices that generated those fees, the banks have to scramble to come up with new revenue streams. Here's how the law affects consumers and banks:
Increases in interest rates cannot be applied to existing balances. This means that when banks announce a new increased rate on a consumers's account, it can only apply on purchases and transactions going forward. Rate increases can not be applied to balances already on the account. This represents one of the banks' major source of revenue.
Double Cycle Billing will be a thing of the past. The bill strictly forbids charging interest on a balance that has been previously paid. Currently banks compute interest base on the last 2 months of billing even if the previous month had been paid in full. The new bill prohibits this practice.
The practice of charging over the limit fees will end. Accepting charges that put the consumer over their credit limit and then charging an over the limit fee will not be allowed unless the consumer opts in on a over the limit program sponsored byt the card. If a customer's purchase puts him over the limit, the charge will simply be disappoved.
Payments will be applied to the highest interest rate first. That amount paid by the consumer that is above the minimum payment due, will be applied to the highest rate in the account rather than the lowest rate which is now the practice of the credit cards.
No fee for paying your credit card bill. Many credit card issuers are charging a fee if the consumer pays his bill in any manner other than mail. It will no longer be allowed to charge for payment by phone, online or electronic transfer. Further, the bill must be in the consumer's hand not less than 21 days before it is due.
College students will have a tougher time getting a card. Anyone under 21 will have to show they have the ability to pay back their credit card charges. The days of easy credit for kiddies and college students are over. Minors may be issued a card without a source of income if their parents co-sign the agreement.
Not surprisingly, the credit card industry is predicting difficulties in the American credit system as a result of this new law. Being for profit organizations, they have no choice but to find new ways to make money of their services to replace that money that will no longer be available as a consequence of the new regulation. Here's what they see in the future:
A return of card fees. Currently only 20% of the card issuers require a fee to open and keep the account. Industry experts are predicting a return to this practice with card fees running between $50 and $100 per year.
Tightening of credit. Banks have suffered their biggest default rates ever, and as a result predict it will become ever more difficult to qualify for credit and limits will be significantly lower. (Editor's note: Does this mean they will only issue cards to people that have demonstrated they can handle credit responsibly rather than mass market to anyone who is breathing? DUH)
Goodbye frequent flier programs Reward programs typically cost the banks 1% of the balance of the account. Expect this plans to be scaled back or eliminated all together. The same will apply for the cash back offers.
Higher check and balance transfer feesBank of America and Discover are already contemplating increasing their fees for balance transfers. Banks anticipate a flurry of transfers to lower interest accounts and this is another way to pick up revenue.
Consumers can expect to see more bad news between now and when the law kicks in. Predictions are for a rash of interest rate increases and a reduction of existing credit limits. In the long run, this new law will best benefit people with excellent credit as every bank will be trying to attract them. The average consumer, unless they can quickly pay off their existing balances, will likely watch their balances grow as new increases hit both new purchases and existing balances.
About the Author:
Chris A Smith reports on consumer credit and personal finance issues. While the Credit Card Bill of Rights is an important step in changing the industry, many consumers will find themselves worse off before it becomes effective. Learn what you can do to protect your credit from becoming a credit victim.
