A few weeks ago, I discussed the proposed “Credit Card Bill of Rights” legislation. This far reaching legislation has been stalled in congress in one form or another for years.

If Congress Will Not Act, Then The Fed Will

This morning, the big news was that the The Federal Reserve, Office of Thrift Supervision and National Credit Union Administration are set to release an entirely new set of rules this Thursday that the credit card companies must play by. Rule number one will be that the credit card companies cannot raise rates on borrower’s existing balances, provided they are not more than 30 days late in making their payments. They will also require that banks provide a “reasonable” amount of time for it’s customers to make payments.

Banks would also be required to apply payments to the highest interest rate debts first, than the lower ones. Earlier this year, I almost fell into that scam.

The Good News

These rules correct what are by far the most troublesome practices of the industry. The banks will moan and groan that since credit cards represent unsecured debt, they should be allowed to raise interest rates when the borrower’s credit score changes, a practice known as universal default. In universal default, when a consumer who defaults on one debt, a company raises your rates on a seemingly unrelated debt, even if it is being paid on time.

If this was not unsavory enough, according to the Wall Street Journal, “Credit-card companies in recent months have raised interest rates on certain cards to offset losses in other areas.” Sorry we made bad loans to other people, therefore we are raising your rates!

I also welcome the call for allowing a fair and reasonable amount of time to pay. Currently, you have something like 20 days from when you statement closes until your bill is due. As companies tell you it takes 7-10 days to receive your statement, and that they recommend 7-10 days for your payment to be sent in the mail, it doesn’t take a math genius to realize that people have 0-6 days to write a check once their statement is received. It also seems like banks will not be able to make payments due on weekends and holidays, a brazenly disreputable and dishonest practice.

Another great change would be prohibiting credit card companies from two cycle billing. That would prohibit them from essentially charging you interest on purchases that you have already paid for.

The rules would also crack down on “over the limit” fees. This is a brilliantly evil practice where the bank authorizes a purchase that is over your credit “limit” only to charge you an excessive fee, per transaction. A cup of coffee or a movie rental each triggers a fee that is many multiples of the “approved” transaction. If a purchase is over the limit, why is it authorized!

It is like that Seinfeld episode where Jerry makes a reservation for a rental car and they tell him that all the cars have already been rented. Jerry responds to the effect, “I don’t think you understand the concept of a reservation.” In the same manner, what part of “limit” do the banks fail to grasp? Under the new rules, consumers would be able to decline this so-called “overdraft protection” racket.

The Bad News

It seems like the fed can do no wrong with these rules, yet somehow they manage to. First, the proposed rules, if they are enacted, only go into effect in mid 2010. Give me a break! These banks change their rules practically minute by minute, yet we need to give them over a year and a half to stop cheating people? That is like telling an alcoholic they need to stop drinking 18 months from now.

What The Banks Say

Predictably, the banks forecast the end of the world as we know it if any restrictions are placed on them. It doesn’t seem that they are crying too loudly this time. It is all too easy for anyone to see that years of deregulation has spelled doom to the credit markets. The banks have been very bad, and everyone knows it. I think that they are happy to be getting off lightly in this case.

How Does This Affect Reward Card Afficianados?

Obviously, people who collect rewards with their credit cards are not, and should not be paying any interest on their cards, ever. For us, two cycle billing and universal default are exotic concepts like the atmosphere on Venus. It is interesting to observer from afar, but we have no plans to experience it. The protections against unreasonable late fees and “over the limit” fees are welcome protections that hit us closer to home when everything doesn’t go according to plan.

If the banks complain in their doomsday scenarios that reward cards will go away, don’t believe them. Even if it were true, I would reiterate what I said when I discussed the Credit Card Bill of Rights;

I do not want to travel for free because banks are profiting through unfair and deceptive credit card practices. If these shady practices are the only reason reward cards exist, frankly, I would rather not vacation on the backs of my less fortunate neighbors who have been cheated by their banks.

This entry was posted on Monday, December 15th, 2008 at 23:07 and is filed under Maximize your Credit Card Rewards, News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.