Yesterday, the Office of Thrift Supervision finalized new rules that address what many consumers and consumer advocates call unfair practices by credit card companies.
The rules address issues such as double-cycle billing, a card company's ability to arbitrarily raise interest rates, and the ever-shortening grace period.
Here is what credit-card holders can look forward to:
1. Interest rates. Under the new rules, the interest rate a card carries must be disclosed when the account is open and remain set for a specified period of time. Card issuers will only be able to raise that rate after the end of that set time period, and the new rate would only apply to new purchases. The old rate would apply to past purchases.
This rule is a boon to those trying to get out of debt. If you have debt and are trying to pay it off, this will help you. It will prevent you from suddenly having to pay 29 percent on your debt instead of the 11 percent you were used to.
Recently, card issuers have been raising rates across the board, even for those who never pay late, simply because they need to make up for profits lost to bad mortgage loans. Why should you pay a higher interest rate on your credit card just because your bank made a mistake? You shouldn't. And under these rules, you won't.
The only exception to this rule: If you make a late payment, that's more than 30 days late, your rate can go up. On past purchases as well.
2. The disappearing grace periods. Grace periods, or the time you have to pay the bill before it is considered late and you start accruing interest and fees have grown ever shorter in recent years. Banks have been trying to trick consumers into making late payments. The new rules now say the shortest a grace period can be is 21 days. In the 1980s, grace periods were a luxurious 30 days, but in recent years that has been cut to about 20 days or no days at all.
3. Payments are now applied to your lowest-rate balance first. This is one trick the credit card companies loved. Say you had a card with a 0 percent rate on balance transfers and a 10 percent rate on new purchases. say you made a few purchases. Of course, when you send your payment, you want it to apply to the part of your balance carrying a 10 percent interest rate. Forget it. The bank would always apply that to your 0 percent balance, and until you paid off your entire 0 percent transfer, you'd still be paying 10 percent interest on part of what you owe. It was a huge profit center for banks and a serious drain on you. Not so anymore.
The new rules say that card companies must apply your payments to the balance with the highest interest rate first OR equally across all balances. My guess if the banks will opt for the second, but it's still an improvement.
4. Double-cycle billing. This is the most egregious of bank practices. Say you have a credit card balance of $100 in March. You pay $50, so in April your balance is $50. Guess what. If your card uses double-cycle billing, which many do (particularly Discover Card), you still paid interest in April as if you owed $100. How? They use your average balance over two months to calculate your interest payment instead of calculating it based on how much you actually owe. How is that fair? It's not. Thankfully, this will soon be illegal.
5. High-fee cards for borrowers with bad credit. This rule applies to secured credit cards. Many have high upfront fees and low credit limits, making the fees almost equal to the credit limit. It's a high price to pay to rebuild your credit rating. The new rules limit these fees to 25 percent of the credit limit and no longer allow banks to charge them as a one-time upfront fee. They must now be spread over the first 6 months the card is open.
How do these new rules help you? If you are trying to pay off your cards, you should have a little more help. When you make a payment it's more likely to go to your highest interest-rate balance, which will help you pay down your cards faster. If you are paying more interest than you should, thanks to double-cycle billing, this will save you a bundle in interest charges and help you pay off your balance faster.
And, this will prevent any sudden interest rate shocks if you carry balance and pay your bills on time. Right now, a bank can raise your interest rate on your total balance with only 15 days notice, and even that is given on a small-type notice in your bill that no one reads.
Just remember, there is a catch. The new rules don't go into effect until January 2010, so you will still have to fight the good fight with your credit card issuers in 2009.