Better Credit Card Rules – Capitalism Requires Some Regulation
Ever since the Senate Committee on Banking, Housing and Hearing Affairs began to investigate credit card practices by the credit card industry, things have began to change for the better. Below are a few examples :
1. Chase does away with the 2-Cycle Average Daily Balance Method
Chase has for the most parts used the 2-cycle average daily balance method to calculate your monthly balances. This method (rather than the normal average daily balance method) confuses consumers because your balance is calculated using 2 months average rather than the current billing cycle. Cardholders who carry irregular balances often get confused about their balances simply because of the calculations. Well, just before the recent Senate Committe hearing, Chase announced that it is doing away with the 2-cycle method and will use the more common average daily balance method.
Citi removes universal default clauses
Citibank has finally stopped practicing and applying the universal default clause. The universal default clause allows credit card companies to increase your interest rates if your credit report shows you have a late payment with another account. Hence, even if you have been paying on time, Citi might still raise your rates. Well, they have stopped practicing this. But the funny thing is that they never had any universal default clause written on their terms and conditions (unlike other credit card issuers)! They just applied this practice anyway!
Capital One is more lenient on their APR increase policy
Capital One used to increase your APR if you were late twice during a six month period. This has now been increased to twelve months. At least it gives cardholders room for “accidentally” failing to pay on time.
Why did we need regulators to step in?
Given that almost everyone has a credit card, you would wonder why credit card companies needed the Senate Banking Committee to have a hearing for these practices to be stopped. In the ultra competitive food and beverage industry, you often see on TV ads comparing one’s own brand versus a rival. I have never seen this happening in the credit card industry. For example, I do not see Citibank saying they only use the average daily balance method whereas Chase or Discover did not! Nor do I see credit card issuers marketing their cards on the fact that they charge no balance transfer fee.
I think the reason is simply because the industry has become an oligopoly. In the past there were more issuers. But bank mergers and consolidation has meant that the industry is dominated by a few key players. MBNA is now part of Bank of America. Bank One is now part of Chase. Orchard Bank is now part of HSBC.
I am all for capitalism and free market forces and generally against excessive regulations. But in the case of the credit card industry, I think I welcome some scrutiny by regulators.
