Tuesday, May 26, 2009

Update on the industry dedicated to screwing its customers

A couple of years ago, I wrote about an industry that was dedicated to screwing its customers: the credit card industry. I'm pleased to note that, thanks to a law signed by President Obama last Friday, there won't be quite as much screwing taking place in the future. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009, which takes effect in nine months, restricts or eliminates some of the sleazy, deceptive or downright predatory practices of credit card issuers.

I never thought that legislation regarding a cardholder's "bill of rights" would ever see the light of day, thanks to opposition from the powerful banking lobby. What a difference a new administration, a financial crisis and hundreds of billions of dollars in government bailout money to the financial sector makes!

The new law does not cap fees or interest rates, but it does eliminate some of the tricks that the card-issuing banks have used in the past to wring as much money as possible out of even the most responsible cardholders: retroactive rate increases, double-cycle billing, "pay to pay" fees, universal default and my biggest peeve of all, "due dates" on days (such as Saturdays and Sundays) when actual payment is not possible.

Credit card statements will now be mailed out a minimum of 21 days before the due date, instead of the current minimum of 14. This will give people more time to pay their bills, thereby reducing the possibility of incurring late fees. Cardholders will now have to give permission for banks to honor transactions that exceed the cardholder's credit limit; this will reduce the incidence of over-the-limit fees. Credit card companies will now be required to apply excess payments to the highest interest balance first, rather than their current practice of applying such payments to the balance with the lowest interest rate. Arbitrary and unannounced interest rate increases will also be prohibited; banks will now have to give 45 days' notice before raising interest rates and, with a few exceptions, can't do it at all during the first year an account is opened. Low-APR "teaser rates" designed to entice people into opening new accounts must also last at least six months. There are also new restrictions regarding the issuance of credit cards to people under the age of 21. This is intended to protect financially-inexperienced college students, who have historically been easy prey for credit card companies.

This legislation will mean less revenue for banks that issue credit cards, of course, so they'll have to compensate. They'll bump up interest rates across the board, shrink or eliminate grace periods, increase fees for processes like balance transfers and cash advances, and implement annual fees on cards that currently have none. Indeed, the "free ride" for the people who pay off their credit card every month - the industry calls these people "deadbeats" because, outside of point-of-sale transaction fees, they don't make any money off of them - is over. I can live with these changes, however, because they're at least straightfoward: the "gotcha"-type practices to be prohibited by the new law were anything but.

It is true that credit card use is voluntary; nobody is compelled to go on buying binges, saddle themselves with a mountain of credit card debt, and put themselves at the mercy of credit card companies. Indeed, consumers need to learn to live within their means. But consumers also deserve protection from practices that are underhanded, unfair and abusive. Credit card companies, after all, already make plenty of money from interest and interchange fees; while the generation of some additional profit in the form of consumer fees and penalties is certainly reasonable, there's simply no justification whatsoever for cheap, greedy, cynical, customer-screwing tricks like sudden or retroactive rate increases, double-cycle billing, absurd payment deadlines or fees for payment by telephone. If you're going to make money, at least do it in a fair and honest manner.

It's good to see that 361 Representatives, 90 Senators and the President of the United States felt the same way.

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