Towards the end of 2008, new regulations were passed that offer much improved protection for consumers from some historically questionable practices.
A great summary of the new regulations is contained in this press release from Consumer's Union:
WASHINGTON, Dec. 18 — New rules adopted by the Office of Thrift Supervision today will help protect consumers from certain abusive credit card lending practices that can result in excessive fees and interest rate charges. The rules were developed in conjunction with the Federal Reserve Board and National Credit Union Administration, which are expected to adopt the same regulations later today. The new regulations will go into effect on July 1, 2010.
“Millions of families have been stung by unfair credit card practices that trap them in debt and make it harder to make ends meet,” said Gail Hillebrand, Consumers Union Financial Services Campaign Manager. “When these rules finally go into effect, they will help protect consumers from being gouged by credit card companies and make it easier for families to manage their finances during these tough economic times.” While praising the new protections, Consumers Union criticized the 18 month delay before consumers finally get relief.
Some of the highlights of these new rules ( remember that they don't go into effect until July 1st, 2010 ):
- Stops credit card companies from raising interest rates on funds already borrowed unless those funds were borrowed on a card with a variable rate, or the minimum payment was late by more than 30 days
- Prohibits credit card companies from levying a late fee if the bill was mailed to the consumer fewer than 21 days prior to the due date.
- Protects new cardholders by barring interest rate hikes during the first year after an account is opened. In the first year, the only way they can raise the rates is if they disclose the impending rate hike when the account is opened.
- Requires payments to be allocated in a fair way across credit card balances with different interest rates. This most commonly occurs when your card balance is a mix of purchases made during a 0% or other promotional period, or if some of the balance is from a cash advance. With the new laws, the payments must be applied to the highest interest balance or in a proportial manner by balance.
- Prohibits credit card companies from charging interest on amounts already paid, through two cycle billing. With two-cycle billing, the credit card company uses two months to calculate the average daily balance, which creates a distinct advantage for them. Discover Card is one company that follows this practice.
- Restrics the financing of fees on credit cards such that the fees or deposits use up the majority of the available credit on the account.
Of course, there's no free lunch, so credit card companies will certainly find a way to recoup the lost revenue from these practices via higher interest rates, new fees, or some other new scheme. Hopefully, however, these new regulations will make it easier for consumers to see where their money is going.