A guide to new credit card reforms
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Tess Vigeland: This week federal regulators rolled out the biggest overhaul the credit card industry has seen in decades. You know why this was necessary — those sudden spikes in you interest rate, new fees you don’t know about unless you spend your free time reading the fine print, the list goes on and on of ways the credit card industries ding us. Ashley Milne-Tyte reports on what the new guidelines means for those of us who use plastic.
Ashley Milne-Tyte: Bill Riley owns two computer repair shops in Rhode Island and Massachusetts. Last year he bought a piece of equipment on one of his credit cards.
Bill Riley: And it was a card that had been empty for almost two yeas. And it had a 12.9 percent rate. I made this purchase that used about a third of the available credit. And when I received the first statement with that purchase on it my rate had gone to 24 percent.
He paid it off as fast as he could. Then he shut down the card. Tony Troutman of California is just as exasperated with one of his card companies — a major player in the industry. Several years ago he took out a cash advance with the company. Troutman says he knew they charged higher interest rates for a cash advance. But he didn’t pick up on something else until recently.
Tony Troutman: What I just realized is all the interest they’re charging me on the cash advance is being added to the balance on the cash advance, so I’m paying compounded interest. Because all my payments are being credited to my normal purchases first.
He says this billing tactic is a sneaky trick that just keeps him in debt longer than necessary. Robert Manning directs the Center for Consumer Financial Services at the Rochester Institute of Technology. He says it’s about time credit card companies were brought to heel.
Robert Manning: The credit card industry has really, literally, been a wild west frontier over the last 10 years as federal regulators have increasingly turned their attention elsewhere.
Now, after thousands of consumer complaints, their attention has shifted. Travis Plunkett is legislative director of the Consumer Federation of America. He says the changes regulators announced this week should save consumers money and confusion.
Travis Plunkett: First and foremost the credit card companies aren’t going to be able to arbitrarily increase your interest rate on your existing balance unless you are truly in arrears, that is unless you’re 30 days late in paying.
And they’ll have to give you 45 days notice before changing your interest rate. Another consumer gripe should also be less common. Bill Riley says he’s sometimes dinged with late fees because there’s little time between receiving his bill and its due date. And he’s noticed many of the due dates seem to fall on weekends or holidays.
Riley: Which presents more opportunity to be late — you pay additional fees, and then you can have your rate increased and another creditor sees that on your report and your rate goes up there, and it’s ? it’s a feedback loop.
Under the new rules companies must give customers at least 21 days to pay. It all sounds like good news for consumers. But there’s a catch. The rules don’t go into effect until July of 2010. Travis Plunkett says the changes are needed now since more people behind on their credit card payments today than at any time since 2002.
Plunkett: And more people are defaulting on their credit card bills and that is only going to increase in the next year or two. Now is when consumers really need this help.
Regulators say financial institutions need the next year and a half to comply. They had pushed for longer. But Robert Manning says the changes don’t go far enough.
Manning: My concern of course is that what we really need is for Congress to pass and codify these changes into an act of law so that there isn’t ambiguity among the different regulatory branches in how they would enforce and penalize those who violated these new rules.
The Credit Card Holders Bill of Rights passed the House in the fall, but has languished in the Senate. Manning and others hope the new Congress will take up the issue again next year.
In New York, I’m Ashley Milne-Tyte for Marketplace.
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