The Obama Administration is pressing for some major changes to the credit card industry, and it’s about time. I understand the credit card companies are in the business of making money, but many of their business practices are unethical at best and borderline illegal at worst. OK, maybe they aren’t illegal, but that is only because they invent new methods of charging their customers that haven’t been covered by the law books.
Don’t get me wrong, I’m not against credit cards. I use them and recommend using them – as long as they are paid off in full each month. The benefits of using credit cards are well documented, and when used properly, they are no more harmful than guns that are used properly. The problem with credit cards is when customers carry a balance, or when card companies assess late fees unfairly. Here are some of the proposals:
New regulations for the credit card industry
Last year Congress passed a bill which included credit card reform and will go into law in 2010. Yesterday the Senate passed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 to regulate several aspects of the credit card industry, including restricting the type and number of fees, and limiting the ability for some people to qualify for credit cards.
Limit universal default. Universal default allows lenders to automatically raise your interest rates if you are late on a payment anywhere, even if you have made every payment to that lender on time. The new legislation would limit rate increases on existing balances to customers who are more than 60 days behind on payments. Credit card companies would also be required to lower the rates to the previous level after 6 months if the card holder makes the minimum payments on time.
Standardizing industry rules for accepting payments on due date. Payments accepted the first business day after a due date that falls on a Sunday or Holiday are considered on time, and payments must be received by 5pm on due date instead of an arbitrary early morning cut off time.
Other notable changes in the bill:
- Banks must send out your bill no later than 21 days before the due date.
- Lenders would be required to post their credit card agreements on the internet.
- Offer customers option to pay their bills online or by phone without additional fees.
- Credit card companies must provide 45 days notice before increasing interest rates.
- Customers under age 21 must be able to show proof of income or have a cosigner to obtain a credit card.
- Consumers must opt in to allow purchases that go over their limit. This will help avoid over the limit fees.
Most of these changes are beneficial to customers and should help clean up the industry by giving customers a better idea of what to expect from month to month.
Things that won’t change about the credit card industry:
- Interest rates will not be capped.
- This does not prevent credit card companies from inventing new ways to add charges or bill customers.
Here is a copy of the Credit CARD Act of 2009 (Engrossed Amendment as Agreed to by Senate).
The responsibility belongs to the credit card user
I think these proposed changes are great. The credit card companies have too much control over fees and and rates, and the system is overly complicated. Standardization in the industry will help consumers better understand the system, and will ultimately help the industry save money in other areas, such as customer support and billing. But ultiomately, the responsibility falls on the user. Card holders sign the credit card agreement and should know and understand the contents, even if it is a 63-Page Credit Card Agreement. The key to successfully using credit cards is to pay the balance in full every month, on time, every time.
What are your thoughts on the proposal?