For many years, the credit card industry has resembled a modern day Wild Wild West. Unrestrained by regulatory discipline, American credit card companies have made life confusing (to say the least) for millions – often with no serious repercussions whatsoever. This lamentable state of affairs has led to the common complaints we’re all familiar with – unexplained fees, random interest rate hikes and the overall sense that you are being jerked around by “The Man.”
However, it appears that the worst of these excesses may be a thing of the past. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (set to take effect in February 2010) aims to protect consumers from unscrupulous credit card policies; but, banks and credit card companies are not going quietly into the good night. According to the New York Times, credit issuers are taking advantage of the “grace period” between now and Februrary to get their last licks in under current, more permissive laws.
Sudden interest rate hikes
The most obvious offense has been last-minute interest rate hikes. According to Pew Charitable Trusts’ Safe Credit Cards Project, credit card interest rates leaped 20% in the first two quarters of 2009 – despite the fall in federally-set interest rates. The Times even reports that one consumer advocate, testifying before Congress, “…cited case after case of struggling consumers who had seen their credit card rates more than double for no apparent reason, even when they had faithfully paid on time.” Critics of the industry allege that such hikes are bare-faced opportunism in response to the new legislation, which mandates that customers be notified of rate changes 45 days before they take effect.
Strict enforcement of overdraft fees
A major component of the new credit card legislation bans the long-standing practice of overdraft protection being enabled by default. Under the new rules, Forbes writes, customers will be required to “opt-in” by agreeing to pay overdraft fees if they spend more than their current balance. Customers who don’t agree will simply forego overdraft protection by not being able to swipe more than they have. While this seems only reasonable, banks actually derive a substantial portion of annual profits from such fees. Bank of America, for instance, raked in nearly $700 million in overdraft fees in just three months of 2009 alone. And according to the Washington Post, overdraft fees rose 35% from 2006-2008. In the meantime, however, banks are stepping up overdraft fee enforcement like never before. Consumers who once were able to explain the fees away with a polite call to their local branch are finding that banks are squeezing every last drop out of this precious revenue source before it is taken away.
“Due date roulette”
More banks than ever have been criticized in recent years for changing due dates without notice. In fact, according to investigative blog FaultlineUSA, some banks have even, “…deliberately designed billing systems to periodically generate payment due dates that are five to six days earlier than normal in an effort to catch automatic bill payers in a missed due date scam.” Victims of this procedure find that their “missed payments” result in permanent interest rate hikes and, “…a whopping late fee.” MoneyUnder30 reported a similar phenomenon in their article “Citi May Move Your Due Date Without Notice.” Faultline calls this abhorrent practice “due date roulette”, and it is outlawed under the new rules that require bills to be sent out no later than 21 days before the due date.
Reducing consumer credit limits
One of the many factors that influence credit scores is a person’s debt to available credit ratio – that is, how much they owe versus how much they can spend. Unfortunately, many banks (perhaps in response to new rules that require advanced notice of major term changes) are unexpectedly lowering consumers’ credit limits. As SmartMoney explains, even, “…folks with good credit scores and solid credit histories are now getting caught in the fray.” American Bankers Association spokeswomen Carol Kaplan was quoting as saying, “…people with credit scores of at least 720…are not immune. They’re doing it to everyone.” American Express specifically “adjusted the credit lines of 20% of its credit-card holders.” Under such a scenario, someone who owes, say, $10,000 can see their credit score drop simply because their credit limit was lowered and their debt to credit ratio thereby worsened. And since FICO scores are roughly 1/3rd determined by how close you are to your limit, the implications for consumers are serious – perhaps most importantly, because, banks tend to charge higher interest rates to lenders with lowered credit scores.
One of the most outrageous (at least from the consumer’s perspective) credit card practices is so-called “universal default.” That’s when missing a payment on one card or account triggers rate hikes or penalties on an unrelated card. For instance, your failure to pay your Visa bill on time could lead to a rate hike on your MasterCard, even though in theory the two cards have nothing to do with each other. According to Tennessee’s Brownville State-Graphic, fees and penalties stemming from universal default may increase during the holidays. Of course, it is worth noting that the very practice of collecting universal default fees is prohibited by the new credit card legislation set to take effect in February.
It’s plain to see that banks and credit card companies are sucking up every last fee, penalty, and point of interest available under current laws. Life after auto-overdrafting and unexplained rate hikes won’t be pretty for these financial behemoths, and it’s hardly surprising to see them gorging upon the American consumer while there’s still time. With luck, some of the common-sense reforms included in the new credit card legislation will curb these practices once and for all.