Summary
The new Credit Card Bill of Rights Act of 2008 will have a limited impact on the credit card industry. So long as the credit card companies, lending institutions and banks are forthright in the rates that they are charging they will continue to reap profits due to their practice of how they charge interest. Only the consumer can affect the credit card companies and other lending institution by becoming informed and choosing not to use the cards that have high rates and “universal default” clauses.
Analysis
For consumers the most burdensome part of having a credit card is the interest rate. Moreover, some credit card companies charge annual fees which are an additional cost above and beyond the interest rate. If the consumer’s credit card is not through a banking institution the credit card company can only turn a profit through the interest rates and other fees that are associated with the card. For the credit card company the fees and interest rates must be high so that they can achieve the financial goals of their company. For the consumer who bears the costs of these fees the meeting of these goals ensures that their interest rates and associated fees will remain at a level that is beneficial to the credit card company.
Whose fault is this one might ask? It is the consumers fault if you look at it objectively. They should not “max” out their credit cards, should not accept the credit cards and definitely should not pay only the monthly minimum amount due on the card. However, one can also blame the credit card companies that implement policies which ensure that almost anyone can obtain a credit card; thereby; assuring that the balances on the credit cards will be high and the profit from the interest will go up.
Here is how the credit card companies usually do business. They issue a credit card to someone. All one has to do is fill out the form and submit the proper identification. A simple credit check is run and depending on your credit score (the higher the score the better your credit) the credit card company will assign an interest rate.
For instance, if you have the median credit score of 600 your interest rate will be in the 15% to 18% range. What this means is that for every dollar you charge you will pay 15 to 18 cents back on it. This interest is usually not an annual interest rate. It is usually a compounded interest rate in which you are paying daily! You will also be given a maximum balance of say $1000. In addition to this amount you might be given a “cash advance” amount of say $500. A “cash advance” is money that you can take out on “loan” from your credit card. All total then in this example you have a limit on the card of $1500. If you charge your limit of $1000 and then take out the additional $500 on the “cash advance” you have maxed out the credit card and now you are deep in debt to the credit card company because you not only owe the principal but the interest also.
Usually the credit card company will give you a minimum balance due monthly of say $25 to $50. This monthly due is primarily going to the compounded interest that you are paying on the card. From this example one can deduce that it is in the best interest of the credit card company to charge high interest rates.
Even if you are disciplined with your card and do not max it out you are still obligated to pay whatever amount you have charged. Even the smallest amount accrues the daily compounded interest. Moreover, some companies enact “universal default” clauses in which they will apply a new interest rate to the current balance and any future balances. This is devastating to the consumer and compounds their already high debt ratio to the credit card company.
The “Credit Card Bill of Rights” enacted by President Obama amend the Truth in Lending Act to give the consumer some relief from the credit card company it covers the following areas:
Creditors cannot increase the annual percentage rate (APR) during the first 12 months of opening up an account.
Creditors are required to provide consumers with a 45-day advance notice of changes in rates and significant contract changes. Rates that change due to a change in the index that the rate is based on are excluded from this 45-day notice requirement.
Promotional rates need to be in effect for at least six months from the beginning date of that promotion.
Creditors need to provide a 30-day advance notice of an account closure. With certain exceptions, credit card issuers are prohibited from charging a finance charge based on the double billing cycle method.
Creditors are prohibited from charging a fee on an outstanding credit card balance at the end of the billing period if the fee is attributed to the interest accrued on an outstanding balance that was fully repaid during that preceding billing period.
Consumers have the right to reject a new credit card after the creditor notifies a consumer reporting agency of its corresponding account.
Creditors are required to remove information provided to a consumer reporting agency about newly established credit card accounts if the consumer has not used or activated the account and if the consumer contacts the creditor within 45 days of its establishment to close it. If two or more different APRs apply to different portions of an outstanding balance, the amount of any payment above the required minimum payment needs to be applied to the balance with the highest APR first and then to lower APR balances.
Creditors are required to provide a grace period for payments even if the cardholder takes advantage of a promotional rate balance or deferred interest rate balance. Creditors are required to send credit card statements at least 21 days before the due date of the outstanding balance.
Creditors are prohibited from providing credit to consumers under age 18 (unless they are emancipated under state law, or the consumer's parent or legal guardian is designated as the primary account holder). For college students who do not have a co-signer, the maximum amount of credit extended will be limited to the greater of 20 percent of the student's annual gross income or $500 dollars.
The aggregate amount of credit extended from all of their credit cards will be limited to 30 percent of the student's annual gross income (for the recently completed calendar year).
Creditors are prohibited from opening a credit card account for any college student who does not have any verifiable annual gross income or already maintains a credit card account with that creditor, or any of its affiliates.
Creditors are prohibited from charging a fee to make telephone and web-based payments. However, a fee may be charged for expedited telephone payments made on the due date or the day before the due date.
Creditors are required to post their written credit card agreements on the internet.
What does this mean for the consumer and the credit card companies? The bill does not address the burdensome interest rates. So long as the company is truthful about their interest rates and provide the written information to the consumer they can continue to charge high interest rates. Moreover, issues such as “universal default” clauses.
While most banks have ended this practice, many credit card companies continue this practice. Therefore, in the long run this bill only means that the credit card company will have to change its reporting policies but not their monetary policies. Even with advance notice requirements for rate hikes, the credit card companies, lending institutions and banks can continue to increase interest rates however incremental these hikes might be.
Many credit card companies, lending institutions and banks will fight this bill because of the new regulatory requirements for reporting and restraints on the issuance of new cards. However, careful analysis will show that the credit card companies profits will not be overtly affected by the new regulations.
