Finally some action against the worst credit card practices

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By Consumers Union on Friday, May 2nd, 2008

The federal banking regulators have finally done something about credit cards. They have approved for public discussion a proposed rule that would stop or limit some of the worst credit card practices. There is much more to be done, but also some reason for optimism. The proposed rule, announced on May 1st and made publicly available on May 2nd, finally acknowledges that consumers need real protection, not just disclosure. All the disclosure in the world can’t make it fair to send the bill too close to the due date; to raise the interest rate on money already borrowed: or to charge a fee for a problem caused by the bank’s practice to allow a credit hold or a debit hold.

The proposed rule responds to a sustained outcry from consumers and strong interest in Congress in credit card reform and in reform of bank account practices such as overdraft loans. The new proposed federal rule includes these credit card reforms:

• No late fee if the bill was mailed to the consumer less than 21 days before the due date.

• Payments must be allocated among balances with different interest rates to give consumers the full benefit of a discounted promotional rate.

• No interest rate increases may apply to money already borrowed except for in these three circumstances: variable rate card, lost or expired promotional rate (then it goes to the regular rate and not a higher penalty rate); or minimum payment is 30 days late. If the bank wishes to raise the rates on a category of transactions, consumers who owe money in that category at a lower rate must be given either five years to pay off the balance or a new minimum payment that includes a percentage of the balance of no more than twice the percentage of the balance in the old minimum payment.

• No charging interest on amounts already repaid, through double cycle billing.

• No more credit cards where the fees or deposits use up the majority of the available credit on the account.

• No credit card or overdraft program fees where a credit hold or a debit hold (in an amount greater than the actual charge or debit) was the cause of the credit card over limit or the bank account overdraft.

The proposed rule also would make it an unfair practice to provide an overdraft loan on a bank account unless the consumer is given an opt-out opportunity. While it is helpful that the agencies are finally recognizing the problems posed by high cost overdraft loans for bank account holders, Consumers Union believes that this form of unsought credit is unfair unless the consumer affirmatively opts-in to such a program.

The proposed rule makes a great start on the basic idea that “a deal is a deal” in credit cards. Consumers Union says that the interest rate shouldn’t go up on money already borrowed, except under a variable rate formula. This rule gets an important part of the way there.

Bankers argue that any regulation restricting penalty rates will cause good consumers to pay for bad ones, but Consumers Union has heard from lots of consumers who tired to be good consumers but found that just one late payment, one overlimit, or a change in their credit score dumped them into the dreaded and hard-to-escape “penalty interest” category. The proposed rule will put a stop to those abuses.

There is more for the federal banking regulators, and for Congress, to do. The proposed rule doesn’t do any of these things:

• Restrict fees to pay a credit card by phone.

• Ban over limit fees if the credit card issuer approved the charge.

• Stop “any time, any reason” changes in the contract for future charges.

• Let consumers outside the Eastern Standard time zone pay until 5pm local time without being late.

• Stop overdraft and bounced check fees on bank accounts which are caused by check holds. The proposed rule apparently addresses credit holds and debit holds but not check holds. Consumers whose banks choose to impose long check hold times may still get stuck with overdraft and bounced check (NSF) fees due to this practice.

• Stop bounced check fees caused by debit holds. The rule apparently stops the overdraft fee when a debit hold causes an overdraft but it may not address the bounce (NSF) fee caused in the same way.

This is a three step process, and this was step one. Next comes public comment, then the agencies decide whether to make any changes in the rules and issue them in final.

Read the full proposed rule http://files.ots.treas.gov/73419.pdf(The rule itself starts at page 153 of this long document).

Read about credit card tricks and traps. http://www.creditcardreform.org/pdf/Top10CCTraps.pdf

In a future post, I’ll tell you how to make your views known to the regulatory agencies about this rule. In the meantime, here is a place to make your views known to members of Congress.

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