Banks React To New Credit Law With New Fees
2:55 AM
In May 2009 the new Credit Card Bill of Rights was signed into law signalling a new way of doing business for the banking industry. The Act, a compromise between the House and Senate bills, changes dramatically the way banks charge for their services.
The new law addresses billing practices that consumers have been constantly complaining about. Many of the perceived unfair fees will be eliminated. However, the bill does not take effect until February 2010 giving banks some time to scramble and come up with new ideas for revenue. Here are the highlights of the new law:
Rate increases cannot be applied retroactively on existing balances. This means when a rate increase is allowed, and that has been trimmed back, it can only be applied to purchases going forward. This is a huge loss of revenue to the banks who currently can increase the rate on all balances at any time with or without reason.
Double Cycle Billing will be a thing of the past. The bill strictly forbids charging interest on a balance that has been previously paid. Currently banks compute interest base on the last 2 months of billing even if the previous month had been paid in full. The new bill prohibits this practice.
The practice of charging over the limit fees will end. Accepting charges that put the consumer over their credit limit and then charging an over the limit fee will not be allowed unless the consumer opts in on a over the limit program sponsored byt the card. If a customer's purchase puts him over the limit, the charge will simply be disappoved.
No more applying payments to the lowest interest rate first. If the consumer has multiple interest rates (promotional, transfer, purchases etc) the amount of the payment that is over the minimum payment due will be applied to the highest interest rate rather than the lowest as is currently the practice.
Online bill payments cannot be subject to a fee. Payments made online or by electronic transfer or by phone can not be charged a fee. This reverses a practice of many credit card issuers. Card statements must be delivered to the consumer at least 21 days before the payment is due.
Minors will have to prove they can pay their bill. Persons under 21 will have to show they have a source of income in order to be issued a credit card. Parent's can co-sign on the agreement to get around this requirement.
Not surprisingly, the credit card industry is predicting difficulties in the American credit system as a result of this new law. Being for profit organizations, they have no choice but to find new ways to make money of their services to replace that money that will no longer be available as a consequence of the new regulation. Here's what they see in the future:
Credit Card Charges. Reliving the 80's and charging for the credit card account is an easy way for banks to make up some of the lost revenue. Annual charges of $50 to $100 are predicted by the banking industry.
Tougher Qualifying After two decades of granting credit to anyone who was breathing, the banks predict they will now have to severely restrict who they grant credit to. Card issuers are facing the largest number of defaults in their history. It would appear that they now are ready to slam the barn door shut and hope somehow new horses reappear inside the barn.
Goodbye frequent flier programs Reward programs typically cost the banks 1% of the balance of the account. Expect this plans to be scaled back or eliminated all together. The same will apply for the cash back offers.
Higher transfer fees. Bank promotional balance tranfers are likely to cost more. Bank of America and Discover are already planning fees in the 2% to 3% range. Similarly, using one of the credit card checks that show up in the mail monthly, will have new fees associated with them.
The new law does not kick in until February 2010 so consumers should brace for another round of rate increases on their current cards. In addition, credit limits will most likely be reduced regardless of history. Over the long run, this law will make banks more reponsible in their lending and competitive. However, in the immediate future, many consumers will sit by helplessly and watch their balances grow as interest rates outpace their ability to pay the balnce down.
The new law addresses billing practices that consumers have been constantly complaining about. Many of the perceived unfair fees will be eliminated. However, the bill does not take effect until February 2010 giving banks some time to scramble and come up with new ideas for revenue. Here are the highlights of the new law:
Rate increases cannot be applied retroactively on existing balances. This means when a rate increase is allowed, and that has been trimmed back, it can only be applied to purchases going forward. This is a huge loss of revenue to the banks who currently can increase the rate on all balances at any time with or without reason.
Double Cycle Billing will be a thing of the past. The bill strictly forbids charging interest on a balance that has been previously paid. Currently banks compute interest base on the last 2 months of billing even if the previous month had been paid in full. The new bill prohibits this practice.
The practice of charging over the limit fees will end. Accepting charges that put the consumer over their credit limit and then charging an over the limit fee will not be allowed unless the consumer opts in on a over the limit program sponsored byt the card. If a customer's purchase puts him over the limit, the charge will simply be disappoved.
No more applying payments to the lowest interest rate first. If the consumer has multiple interest rates (promotional, transfer, purchases etc) the amount of the payment that is over the minimum payment due will be applied to the highest interest rate rather than the lowest as is currently the practice.
Online bill payments cannot be subject to a fee. Payments made online or by electronic transfer or by phone can not be charged a fee. This reverses a practice of many credit card issuers. Card statements must be delivered to the consumer at least 21 days before the payment is due.
Minors will have to prove they can pay their bill. Persons under 21 will have to show they have a source of income in order to be issued a credit card. Parent's can co-sign on the agreement to get around this requirement.
Not surprisingly, the credit card industry is predicting difficulties in the American credit system as a result of this new law. Being for profit organizations, they have no choice but to find new ways to make money of their services to replace that money that will no longer be available as a consequence of the new regulation. Here's what they see in the future:
Credit Card Charges. Reliving the 80's and charging for the credit card account is an easy way for banks to make up some of the lost revenue. Annual charges of $50 to $100 are predicted by the banking industry.
Tougher Qualifying After two decades of granting credit to anyone who was breathing, the banks predict they will now have to severely restrict who they grant credit to. Card issuers are facing the largest number of defaults in their history. It would appear that they now are ready to slam the barn door shut and hope somehow new horses reappear inside the barn.
Goodbye frequent flier programs Reward programs typically cost the banks 1% of the balance of the account. Expect this plans to be scaled back or eliminated all together. The same will apply for the cash back offers.
Higher transfer fees. Bank promotional balance tranfers are likely to cost more. Bank of America and Discover are already planning fees in the 2% to 3% range. Similarly, using one of the credit card checks that show up in the mail monthly, will have new fees associated with them.
The new law does not kick in until February 2010 so consumers should brace for another round of rate increases on their current cards. In addition, credit limits will most likely be reduced regardless of history. Over the long run, this law will make banks more reponsible in their lending and competitive. However, in the immediate future, many consumers will sit by helplessly and watch their balances grow as interest rates outpace their ability to pay the balnce down.
About the Author:
Chris A Smith reports on consumer credit and personal finance issues. While the Credit Card Bill of Rights is an important step in changing the banks, many consumers will find themselves worse off before it becomes effective. Find out what you can do to protect your credit from becoming a credit victim.
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