The Fed has drawn up a set of rules to police behavior by credit card issuers. On the surface, it all looks good. However, there may be some unintended consequences. Here are the proposed rules and my thoughts on the matter.

1. Placing unfair time constraints on payments – While consumers may cheer this, I honestly think this is the most ridiculous thing I’ve come across. In the corporate world, if a company misses a coupon payment on the bond, the bond trustee would immediately act on behalf of the bondholders. Lawsuits will be filed, and the company has to negotiate with creditors if they want to avoid filing chapter 11. If payment was missed due to extraordinary circumstances, the borrower may have to pay a fee to the creditors. Why should consumers be given leeway. The Feds are proposing that payments are not considered late unless we have been given 21 days to make a payment. My experiences so far is that credit card companies will not report late payments to the credit bureaus unless you have been late by 60 days. Well, I guess consumers will benefit as we may not be charged any interest unless we are late by 21 days. I’m really not too sure if that is a good idea.

Unfairly allocating payments among balances with different interest rates. – Presently, when you have transferred a balance on a 0% APR deal and you carry more balance on top of that, the payments that you make above the minimum amount will be used to reduce your balance that is charged the 0% rate. That is how issuers make their money on 0% deals. If you charge more expenses to the card, they will earn that higher interest and you cannot pay it off. Well, under the new Fed proposals, this practice will come to an end. An extra payments above the minimum payment will be used to pay the higher interest balance.

Sounds good? But credit card issuers will suffer. One unintended consequence may be that banks stop offering good 0% APR deals.

Unfairly raising annual percentage rates on outstanding balances. – Under the first proposal, issuers cannot raise your interest rates unless you are late by more than 20 days. This proposal will prohibit issuers from raising your rates just because you miss your mortgage payments. This effectively bans the practice of universal default clause.

On surface this sounds great. However, credit card issuers do have a valid point in that you are a more risky borrower if you miss a payment on another debt obligation. In the corporate world, if a corporation miss one couple on one bond, technically, the company has defaulted – not just on their bond, but on every creditor.

I think another unintended consequence is that credit card issuers will have higher issuing standards and APR will be higher than what it would be without this.

Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account, usually by rental car companies or hotels. – This is long overdue and a wise proposal.

Unfairly computing balances with methods such as “two-cycle billing – I definitely second this proposal. Most people do not understand APR or how to compute their monthly balance. Having 2-cycle methods only add to the confusion.

Unfairly adding security deposits and fees for issuing credit or making credit available – The rules would ban fees that consumed a majority of a new card’s credit limit. Sounds familiar. Yes, sub prime cards! Subprime cards normally charge a one-time application or processing fee, a monthly maintenance fee and high APR. Most will only given you a credit limit of $300. By the time the fees are taken out, a new cardholder only has an initial limit of $100!

One is tempted to think that it is great for sub prime borrowers because all sub prime credit cards charge these ridiculously fees. But having said that the reason they do that is because regular issuers will not even issue cards to sub prime candidates.

Question is what happens if they are forced not to charge these fees. Will these subprime issuers feel that they are compensated for lending to less than desirable candidates? I don’t know the answer to that but time will tell. Another unintended consequences.

Making deceptive offers of credit – Issuers have to state clear what you need achieve the APR or teaser deal that was advertised. This is a great thing because if prevents impulse purchases. If only they would enforce that with cell phone companies or cable companies (with all their pay so little for 6 months but do not tell you what happens after the teaser deal is gone!).

I would certainly like to hear your thoughts on these changes.

In my last post, I talked about credit card debt and lifestyle sacrifice. On a related topic, one of the real question that has always been bugging me is why does our expenditure always go up with our income?

One of the effects of the weakening of the economy is that we are going to see people and household cut back on expenditures. For example, we are now cutting back on our Starbucks Coffee, purchases of SUVs are down, we are eating out less.

But then the question becomes why do we always increase our discretionary spending when our income goes up or if things feel better? Why do we not think about always being frugal? Mrs Credit Card and myself are always wrestling on this issue. For example, one of my goals is to pay off my mortgage as fast as I can. But I would also like to fund my retirement much earlier. While I have started putting extra money aside a month to pay off principal on my house, I have also recently just bought a new Lexus. I have noticed that we each out more often when our income goes up. I think part of the problem is that deep down inside, we always have a dream as to our ideal lifestyle. So a couple of nights ago, I sat down and took down some notes as to how I want my lifestyle to be if I had all the money I wanted.

Ideal Lifestyle

1. Job – Probably volunteer for a non-profit full-time plus maybe be a full-time blogger (if I’m any good at all). – Yes, that would be my ideal lifestyle. No more having to worry about putting the bacon on the table everyday or dealing with 9 to 5 corporate politics.

2. Car – Guess after my latest car purchase, I already have my dream car. (I’m not a very huge car fan!)

3. House – Oh, the house. I don’t know where to begin. Dream kitchen, dream master bedroom, dream fireplace. Guess I would like to have a Mansion with a pool, some expensive artwork around the house, acres of space (more like acres of land).

4. Have a personal fitness trainer – I know that I should be working out everyday to keep fit. But I really lack the discipline to do this. Ideally, I would like to be able to hire a fitness coach.

5. Have a massage twice a month – How nice would that be if I can pamper and indulge myself! Good for stress management as well!

6. Hire a full-time chef – how nice would that be? Mrs Credit Card would sure love that!

Consequences of living a larger lifestyle than you can afford

Part of the reason why I think people have credit card debt is because we choose to live our ideal lifestyle before we can actually afford to.

One of the biggest culprit is the desire to “renovate our house”. I know so many cases of folks who have credit card debt (or any other debt) and still are pretty relaxed about taking out a home equity line of credit to do some home renovations!

I guess living in a nice environment is important. But a home renovation can get really expensive and so this can really put a dent on your finances.

I also know many people who are in debt and drive an even more fancy car than myself. Or doctors who pull in seven figures every year and still have a six figure credit card debt.

How much can we upgrade our lifestyle when our income increases?

Here is the six million dollar question. When you get a raise or increase in your income, how much can you “upgrade your lifestyle”? Or rather, should you even upgrade your lifestyle.

Here is how I think most of us do it. We get a raise, so we eat dinner out 2 times a week instead of once a week. We get more generous with paying for kids activities. We spend more on organic food! We get a bigger car. We take a more fancy vacation.

But if we really think about it, if we use the extra income we have and put that into our retirement account, we will probably reach our retirement goals earlier. Or perhaps you can pay off your mortgage early, or fund your kids college education.

But What’s The Point Of Being So Frugal That You Do Not Enjoy Life?

That is such a valid question. Especially when you have kids. You are always tempted to get things for them, whether it is a book or a little treat or a vacation that they will enjoy. So what gives?

Your Ability to Upgrade Your Lifestyle Depends On Your A Few Things

Specifically, I think several factors affect your ability to live it up when you get a raise or when you fortune turns for the better. It really depends on

1. How reliable is your income?
2. What is your fall back when you lose your income.
3. Your potential income growth.

Let’s take a look at some examples.

Couple are teachers

I know of friends who are teachers (both husband and wife). In this case, we have a couple who are making a decent salary, but will never really be super wealthy. Yet, they have stable jobs. Hence, when they get their salary raise (can’t imagine it being much), this couple would probably well increase their quality of lifestyle modestly.

Couple who work on Wall Street

I do have friends who both work on Wall Street. They make lots of money. Having said that, they have very high risk as they could easily be laid off at the same time and they face the same industry risk. Folks like them can probably increase their lifestyle when they get their huge increase in bonus but would be wise to set aside lots of emergency cash. Many folks on Wall Street live on their base salary and save their bonus (very wise).

Couple who are both real estate agents

Almost the same situation as the above Wall Street example. But in this case, their incomes are more unstable (at least you get a salary on Wall Street and some bonus every year). When such couple have bumper years (like the first part of this decade, they should always save for the rainy day (like now).

Couple – One is a teacher and one is a doctor! – This may be the ideal situation. Teacher has a safe job and his or her salary can be base to set their basic lifestyle standard. When doctor earns more, they could conceivable feel free to increase their standard of living as the teacher has a safe and stable job.

THE TOUGH BALANCING ACT

When we get a raise, it is easy to simply “upgrade your lifestyle”. Yet, deep down inside, we know that “delayed gratification” is probably the better path to financial freedom and security. So what gives? I think due to human nature, it requires a tough balancing act on our part. When our economic circumstances improve, it is only natural and probably sensible that we reward ourselves a little but yet at the same time take advantage of it and set aside more money for the rainy day.

Steps I have taken to help control expenditure increase when my income increases

Here are a couple of preliminary steps I have taken to help me be a little more systematic about this thought process. I have written down how I will spend if I get more money every month. So here goes.

1. Put more payment to mortgage payment – if I manage to do that then perhaps I could give ourselves a treat and having a couple of extra nights out for dinner. (already doing this).

2. Put extra money into the 529 College Savings Plan (perhaps I should be doing this before the weekly dinners!)

3. Only start our kitchen and backyard renovations when we have cash to pay for it.

4. Live my ideal lifestyle only if we had $10mm!

So what did your expenditure increase when you salary last increased?