While the $700 billion bailout and presidential elections have dominated the news, the House of Representatives passed a major piece of credit card reform legislation. The Credit Cardholder’s Bill of Rights Act of 2008 passed the House on September 23, 2008 by a vote of 312 to 112 (with 9 members not voting). While the bill still needs to pass the Senate before heading to the White House, it includes some provisions that would have a major impact on everything from how credit card issuers apply cardholder payments to outstanding credit card debt to limitations on increases to interest rates. Here are some of the more significant provisions of the Act
Retroactive Interest Rate Increases and Universal Default Limits
One of the biggest complaints leveled against the credit card industry is the practice of raising interest rates significantly due to a late payment or other default, or sometimes for no reason at all. The Credit Cardholder’s Bill of Rights would limit a card issuer’s ability to raise interest rates. Specifically, a credit card company could not (with some exceptions) raise interest rates on existing balances. Furthermore, if the interest rate on future balances was raised, the credit card issuer would be limited in how quickly it could insist that the old balance subject to the lower interest rate is paid off.
Here are some other interest rate hike protections the Act would provide:
- If a cardholder loses the benefit of an introductory rate, the new rate cannot exceed what the interest rate would have been at the expiration of the introductory period.
- A consumer must be given a 45 day written notice before higher interest rates take effect.
Pro Rata Payment Allocation
The Act’s provisions related to pro rata payment allocation are absolutely critical to 0% balance transfer credit cards. Here’s the problem. Suppose you have a $5,000 credit card balance at 0% from a balance transfer offer. Let’s also assume that you’ve charged $500 worth of purchases that are subject to a interest rate of 10%. If you pay $500 at the end of the month, which balance does it go towards?
Under most credit card agreements today, the payment would go to the 0% balance first. Only once that was paid off would you begin to make a dent in the $500 balance subject to 10% interest. That’s why I never use my balance transfer cards for purchases. Under the statute, however, credit card companies would be required to allocate your payments across both the interest free balance and the balance subject to a higher interest rate. While this is good news for consumers in general, the new law could limit the availability of balance transfer credit cards.
Double Cycle Billing
The statute would also attack a practice that has long been criticized by consumer advocacy groups, double cycle billing. Also called two cycle billing, under this practice, some credit card issuers go back two billing cycles, not just one, to calculate a cardholder’s average daily balance. The result can mean that you will pay interest on balances you paid off the previous month. This chart from a GAO report does a nice job of describing this practice (click image to enlarge):
Statements Must be Sent 25 Days before they are Due
The Credit Cardholder’s Bill of Rights would require credit card companies to send out your bill at least 25 days before it is due. The intent is to give consumers ample notice and an opportunity to pay the bill before interest charges accrue.
Over the Limit Transactions
This is where common sense and sunshine break through the dark clouds of consumer credit. Today credit card companies charge a fee if you go over your credit limit. The problem is that they let you go over the limit! Rather than rejecting a transaction that would cause you to exceed your available credit, the credit card companies approve the transaction, and than whack you with a fee.
Now one could argue that consumers should know their current balance and their credit limit, and not make purchases that send them over their limit. True enough. But there is something a bit twisted with the current scheme. The Act would allow consumers to elect to have their credit card company reject any transactions that would send them over their limit.
Subprime or Fee Harvaster Cards
This covers the truly dark side of the credit card industry. There are a variety of “bad credit” credit cards aimed at those with poor credit. The terms of the cards make payday loans look like a good deal. For example, check out the terms of the Tribute Gold Mastercard:
- Credit Limit: $300
- Annual Fee: $150
- Account Maintenance Fee: $119.40 (billed monthly at $9.95)
- APR for Purchases: 24.50%
Here’s how all the above adds up, according to the credit card issuer:
Available Credit Limitations: If you are approved for the $300 Card, your credit line will be $300 and your Annual Fee of $150 will appear on your first statement. Your initial minimum payment of $30 must be received, cleared and posted on your credit card account before you can activate your card and use your credit card account. Your initial available credit will be $180. You will be billed an Account Maintenance Fee of $9.95 per month (total of $119.40 per year), beginning after you make your first purchase or cash advance.
The bill does not put a stop to these type of predatory lending practices, but it tries. What the bill provides is that if annual fees the first year exceed 25% of the available credit, the fees cannot be charged to the card. So in the case of the Tribute card, the consumer would have to shell out the $150 fee and annual account maintenance fees rather than having them “conveniently” added to the card.
Impact on Credit Card Offers
As you might imagine, the credit card industry is not in favor of the statute. Like any consumer protection law, there would be some unintended consequences. For example, some credit card issuers have already started to raise interest rates on some cardholders in anticipation of this type of credit card reform becoming law. In addition, there is the potential for this Act to have a negative impact on balance transfer offers, cash back rewards, travel rewards, and other lucrative credit card offers.
If you’d like to read the statute in its entirety, you can check it out at GovTrack, a great site to track federal legislation.