Rate Gauging on Consumer Credit Cards Gets the Boot

As if there is not enough controversy over Interchange Rates charged to merchants, we now have to deal with consumer credit cards interest rates increasing drastically without notice. Some consumer spending experts say this may hinder spending even more this holiday season. What is our government doing to fix the issue?

Federal regulators jumped into action and passed laws to protect consumers from increased interest rates on existing account balances. Government rules seem to run at a snail’s pace as these laws will not take effect until July 1st2010; that’s a lot of money in the banks’ pockets in the interim. Millions of card holders will get raked over the coals, paying high fees on previously made purchases until these laws kick in.

Credit card companies will still be able to raise rates on new credit cards, future purchases or cash advances. Finally, the Federal Reserve and National Credit Union Administration are cracking down on arbitrary hikes in interest rates. It would seem that we  have learned a lot from subprime lending. These rules will also stop the issuing of credit cards to people that all ready have a large amount of debt, and who were previously getting approved by banks for high interest rate cards.

Some of the new rules include:

  • Consumers will have to be given 45-day notice before any changes will be made to the terms of their account.
  • Rate hikes will still be allowed on cards with payments more than 30-days late.
  • Late fees cannot be charged without giving at least 21 days to make a payment.
  • Most cards currently charge a different rate for different balances, such as purchases versus cash advance transactions. Card companies will now be required to apply any payment above the minimum amount due proportionally to all balances, or to the balance with the highest interest rate.
  • Finance charges can’t be assessed on paid-off balances from prior months on a current month’s billing cycle

Credit card companies take huge risks in issuing credit to people who have below average credit, so they hike up the interest rate for everyone to make up for their losses. Because these guidelines are being tightened, banks will have to be more cautious as to whom they give credit to. With less credit circulating around, we will ultimately have fewer purchases at retail locations. Hardest hit will be the online businesses since some purchases can only be made using a credit card. The other areas it will affect will be revealed in time.