The credit card reform bill just passed by Congress includes tough new provisions that will legally ban some of the most egregious behavior by banks. But as in all such laws, the devil is in the details.
There's already some confusion about what the Credit Card Accountability Responsibility and Disclosure Act does and doesn't require. Here's a true-and-false primer.
The legislation caps interest rates and fees. FALSE.
The banking industry was able to successfully kill provisions that would have capped rates. The bill does address exorbitant fees -- such as a $39 fee for a payment that's one day late -- but it punts questions about rates to the Federal Reserve, which is directed to set up "reasonable" and proportional fee schedules. Those rules might be the most important part of the legislation, as increasingly, credit card fees are a bigger problem for consumers than finance charges. Stay tuned.
It will lower your credit card bills. FALSE.
Some consumers might eventually benefit from fewer penalty interest rate increases and fees. But in general, the law does not affect current rates, balances or fees.
It will raise your rates. TRUE.
Banks have nine months to operate under the old rules. They will likely sneak in as many rate increases as they can before the bill takes effect.
It will make 'good' users pay for bad users. FALSE.
Yesterday, the credit card industry persuaded many journalists to suggest the law dooms perks like frequent-flier miles. Miles are progressively devalued anyway, so that's no great loss. These perks also often seduced consumers into cards with bad terms (miles cards almost always have higher interest rates, for example). Annual fees may reappear, but for many consumers, "free" cards with sneaky fees are more expensive than cards with a predictable annual fee. And in the past six months, "good" credit cardholders have been treated to huge rate increases and credit limit restrictions anyway – not because of federal law, but because of the banks'bad business practices. In general, the credit card industry has made its living through ill-gotten gains earned mainly through deception and confusion. Any business built that way is doomed to fail. Purging the industry of treachery is good in the long run.
It bans retroactive interest rate hikes. SORT OF.
Among the more offensive credit card practices has been the implementation of penalty rates on past balances. Currently, if you have a card with a $2,000 balance at 8 percent, the bank can raise your rate to 29 percent for any reason -- and the increase covers past purchases and unpaid balances. Now, such rate increases will only apply to new purchases under some conditions, and that's good. There are exceptions, however. If you are 60 days late paying your bill, the rate can reach back into old balances (thereby guaranteeing that a consumer who is 60 days late can't possibly hope to pay the debt off). Also, cards with variable rates are exempt. Expect to see many more variable rate cards in the coming months.
It speeds up the rules issued by the Federal Reserve earlier this year. FALSE.
The bill gives banks nine months to prepare for the changes, meaning they can still carry on behaving badly until at least February 2010. The Fed rules published earlier this year were set to take effect in July 2010, so there's not a dramatic change.
It substantially improves upon the credit card regulations already approved by the Federal Reserve. TRUE.
The 60-day provision for retroactive rates, for example, is a valuable added benefit for consumers. So are the rules limiting marketing to young adults and mandating "reasonable" fees. It's also significant that these changes are now part of U.S. law, and not merely banking regulations.
It bans over-the-limit fees. WE'LL SEE.
The bill will require consumers to "opt in" for over-limit coverage and the resulting fees. All consumers should turn this feature off. We'll see how easy that is when implemented.
It bans two cycle billing and universal default. TRUE.
These two unseemly practices have already been abandoned by most card issuers. In universal default, banks raised rates because consumers were late on unrelated bills. In two-cycle billing, banks charged interest on two months worth of purchases even if the consumer was only late on one'months full payment. A law banning them permanently is good, however.
Even when interest rates are jacked up, consumers have new rights. TRUE.
Consumers slapped with rate increases can opt to pay off their existing balances at the old rate in reasonable time frames (either five years or twice the latest minimum payment per month). That's a vital new protection.
It will strike a stake through the heart of those fee-harvester cards. FALSE, BUT…
Recently, we wrote about cards targeting credit-troubled consumers that arrive with $250 limits and nearly $200 in fees. According to the bill, fees cannot exceed 25 percent of the initial credit limit.In the example above, the highest fee could be $62.50. While not eliminating fee-harvester cards, the law will make them fairer.
The bill also allows carrying of loaded guns in national parks. TRUE.
Oh, the irony. The fine print in a law banning fine print does include a provision that allows carrying of loaded weapons into national parks. Surprisingly, the amendment passed by a wide margin and with little discussion.
Consumers should celebrate. A LITTLE.
This is the first important new consumer protection approved by Congress in a long time, and the credit card issuers had it coming. But while the law does make some fees illegal, stopping sneaky behavior by banks is a bit like a game of Whack-a-Mole. Banks are pretty creative about this kind of thing. For example, while the unfair practice of universal default has been eliminated, it's already been replaced by other chicanery. Earlier this year, we told you that banks were raising rates and lowering credit limits based on where consumers shop. Shopping at a store which is also frequented by consumers who tend to be late on their credit card bills will get you dinged. If you want to be really alarmed about this practice, read this New York Times story from the weekend. More important than any new law that's passed is a clear message from the White House and government regulators that the era of anything goes, "Gotcha" banking has come to an end. Only time will tell if that message has been delivered.