This is a guest post from Adam Jusko, founder of IndexCreditCards.com, an information and comparison site for credit card offers that maintains a list of over 1200 cards. I’ve mentioned Index Credit Cards many times before, most notably in my post from 2006 called “The Only Credit Card Guide You’ll Ever Need”. This is an update to Adam’s guest post in January that explored what the Credit Card Act means to average Americans.
The final set of regulations from the sweeping Credit Card Act (signed into law last year) will take effect on August 22nd. Last Tuesday, the Federal Reserve nailed down the exact details of this latest round of regulations. They include:
- Credit card companies will no longer be able to charge any fee of more than $25 for late payments or other customer transgressions unless the card issuer can show that the customer has repeatedly broken the rules of the card agreement, such as multiple late payments over a short period of time.
- Credit card companies can no longer charge fees greater than the amount of the payment due. For example, if you are late to pay but the minimum payment due is only $15, the bank could not hit you with a late fee of $25, but could only go as high as the $15 owed.
- Credit card issuers can not charge “inactivity fees” if cards are not used for a certain period of time.
- Multiple fees can not be charged for a single mistake. For example, you could not be charged a late fee that pushes you over your card’s credit limit and then be charged an over-the-limit fee. (Previous Card Act regulations eliminated over-the-limit fees for most consumers, but some still choose to have the option of exceeding their limits.)
- Credit card issuers must review all interest rate hikes levied since 01 January 2009 “to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.”
On the surface, there’s no doubt that these regulations, as well as those enacted previously as part of the Card Act, are good for consumers. The most egregious practices have been eliminated, fees have been brought down to more reasonable levels, and now the Fed is even forcing card companies to go back and consider lowering rates on the millions of customers who’ve had their rates jacked up in the last year and a half.
However, consumers should understand that with the benefits come some consequences. The government has been hitting at some of card issuers’ biggest profit centers. They’ve limited the types of fees that issuers can charge, and have now capped the amounts they can charge as well. Believing that card issuers will meekly accept these changes and adjust to this new lower-profit model would be naïve. Instead, prepare for the following:
- Annual Fees. Previously, I was unsure of how aggressive card issuers would be in reintroducing annual fees. After all, one of the drivers of growth in the industry was the move away from annual fees. But, with the new cap on late fees and the eradication of inactivity fees, the industry is even more likely to revert to a “pay to play” model. This will no doubt be true for those with shakier credit, but even good-credit customers may be surprised to see annual fees slapped onto their cards, especially if they don’t use the cards very often. The new regulations make it increasingly expensive to take on the risks associated with shaky credit customers, or to service accounts of good customers who don’t contribute to the issuers’ bottom lines. The only way to make it worthwhile to keep certain customers is to charge them an annual fee.
- Higher Credit Card Interest Rates. Yes, the Fed is telling issuers they must review their rate hikes going back to the start of 2009. But they aren’t actually forcing issuers to reduce anyone’s interest rate. And the Fed isn’t planning on getting into the minutiae of why an interest rate was increased or should be decreased on every individual customer. This would be horribly time-consuming to enforce, and, really, is there an objective standard when it comes to interest rates? All an issuer needs to say to justify an interest rate is “Our risk formula suggests this is the correct rate.” How exactly can the Fed argue against this? Therefore, at best, your current credit card may retain its current interest rate, but if you ever need to apply for a new card, don’t be surprised to see that rates have skyrocketed.
For many people, this last set of regulations from the Card Act may be the final nail in the coffin when it comes to their credit careers. Many card companies simply won’t want to deal with them anymore. And maybe that’s not a bad thing.
Perhaps creating a level playing field should result in certain people being shut out — after all, credit is a service, and there’s no real reason to expect that it should be free, or that those who misuse should be allowed to continue doing so.
However, I won’t be surprised if the people who howled loudest over card issuers’ unfair practices are the same ones howling over the loss of their credit cards rewards in the new, regulation-heavy environment.
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