Good news / bad news on Credit Cards

Fed OKs credit card crackdown - Regulators approve a number of key protections for credit card customers


The Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration approved the regulation, which prohibits banks from certain practices like applying interest payments in ways that maximize penalties, and forces lenders to be more transparent about their billing practices.

"These protections will allow consumers to access credit on terms that are fair and more easily understood," Federal Reserve Chairman Ben Bernanke said in a statement.

The regulations mark an end to double-cycle billing, which averages out the balance from two previous bills. That means that consumers who carry a balance will no longer get hit with retroactive interest on their previous month's bill. And credit card companies will no longer be able to raise the interest rates on pre-existing credit card balances unless a payment is over 30 days late.

Consumers will also be given a reasonable amount of time to make payments, and payments will be applied to higher-rate balances first, to reduce interest penalties and fees.

Credit card statements will clearly list the time of day that a payment is due, and any changes to accounts will be in bold or listed separately.

And, finally, no more universal defaults - a policy that allowed credit card issuers to increase the interest rate on one card if a customer missed a payment on another card.

The Fed's Price Controls - Raising the cost of credit cards.


That might sound good if you're those borrowers, but for everyone else it will mean higher rates even if you treat credit responsibly. If the banks can't raise prices on the riskiest borrowers, they will either limit to whom they lend or raise rates on everyone -- or both.

The new rules will also appeal to those who think Americans spend too much, and save too little, and blame credit cards for encouraging the trend.

But now seems like a particularly inopportune moment to tell banks that they should do less to manage their exposure to credit risk. Banks are already pulling back on consumer credit as the economy worsens and the credit crisis drags on, with lower credit limits and higher rates. If the Fed votes in favor of its new rules Thursday, expect that trend to accelerate.

Comment: The law of unintended consequences! How bad is it? (first article)

In the midst of a credit crunch, Americans have about $976.3 billion in revolving credit and 4.9% of all credit cards were delinquent in the third quarter, according to the latest data from the Federal Reserve.

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