New credit-card rules that took effect this week should help consumers, but there needs to be a watchdog to back them up.
The Obama administration has proposed a Consumer Financial Protection Agency, which would help shield consumers from predatory lenders and unscrupulous credit-card companies. Ideally, this new agency should be independent, with the authority to crack down on financial institutions’ worst consumer-unfriendly habits.
The Senate is working on the idea, although some Republican lawmakers are trying to weaken this proposed watchdog. Consumers need it to have teeth.
The new law took effect Monday. Even before that, some credit-card companies were engaging in abusive practices, raising interest rates unconscionably and charging new fees.
And there are some loopholes in the new law that consumers should be careful to avoid.
The regulations require credit-card companies to apply customers’ payments first to the charges with the highest interest rates. But if the customer only makes the minimum payment, the company is still allowed to apply it first to the charges with the lowest interest rates. It’s good motivation for customers to try to pay more than the monthly minimum.
More hidden charges are likely to surface as credit-card companies try to recoup some of their lost fees. Annual fees, inactivity fees, and other charges could show up in the coming months.
It’s imperative to read your monthly statements and the fine print. You might not succeed in fighting such charges, but you could switch to another company that doesn’t charge them.
Credit-card issuers can no longer raise interest rates on an existing balance unless the cardholder is 60 days behind on payments or has agreed to a variable rate. Companies also cannot charge over-limit fees unless the customer opts out of this rule, and bills must be mailed at least 21 days before a late charge would be imposed.
The Federal Reserve Board, which implements the law, already has banned two sneaky tactics attempted by some credit-card companies, including a loophole called “variable-rate floors,” which allow adjustable rates to go up but not down. The industry won’t stop trying to find new and creative ways around the consumer safeguards.
Issuers are still allowed under the new law to lower your credit limit without warning for no reason, increase your minimum monthly payments, or charge fees for a zero balance.
For all these reasons, consumers still need an independent monitor to ensure the protections in this new law will be honored.