Credit Rules Change: ‘Consumer Protections’ Killing Those Intended to Benefit?

by on August 31, 2009 · 4 comments

in Civil Rights, Economy, Media, War and Peace

Originally posted August 24, 2009

WARNING: Boring accountant-esque babble and an abundance of run-on sentences ensue…

Do you carry a credit card balance? You suck. Don’t worry, I do too, and so does my girlfriend, my mom, my sister…but hopefully you’re trying to stop your spending and are hacking away at that balance with the rare nickel and dime left over from the shrinking paychecks most of us are thankful to still have at all these days. The average American adult is about $4150 in the hole and has 12.7 credit accounts open, meaning $8300 for a typical couple or family is middle-of-the-road nowadays.

Don’t carry a balance, but still have some cards? Well, like those of us bitterly envious of your financial responsibility and/or good fortune, get ready to bend over.

Back in May Congress, without much fanfare outside the financial sector, approved a series of changes to Regulation Z, the socalled Truth in Lending Act, via the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit Card Act).

The first few of these changes, effective as of last Thursday, is a regulation requiring credit card issuers to give 45 days’ notice of intent to make a significant change to the terms of an account. Previously most cardholder agreements allowed a lender to change terms at will, having them take effect on the next statement. Scrambling to get ahead of these rules once they were affirmed by the Federal Reserve on July 15, many card issuers have been sending out notices of immediate changes to even their best customers, in fear that their changes might be rejected if a consumer had time to shop around or pay off a debt before getting hit with worse terms.

What’s the rub here? Maybe you’ll get a notice that your rate is going up three points or more – for example, Discover just took me from about 13% to something like 17.9%. When I called to complain and ask for justification they simply cited “financial need.” I’m still wondering whose, because my needs were certainly better served with the lower rate, but I’m left thankful that was the card I’d been working on and had just paid off the month prior. I’ve been a cardholder since 2002, I’ve never been late and have never gone over my limit even once in the last seven years.

Another way you could get hit is with an unexpected and unexplained lower credit limit. My girlfriend’s Visa limit got cut a week later from $3200 to $1900. She wasn’t maxed out, but this change meant that her ratio of credit used to credit available went from about 34% (considered ‘ideal’ by credit rating agencies that determine one’s FICO score) to 58%, which could mean to a cut of 20 points or more on her credit score, which could in turn translate to an inability to refinance a car loan to take advantage of today’s relatively low rates on fixed term loans, or even could trigger a rate increase on that same card since she’d now be considered a higher credit risk.

In the worst case scenarios, I’ve heard of cardholders cutting limits to below the balance carried (say you owe $2000 on a $3000 limit card and the lender cuts your limit to $1600), triggering over-limit fees and default interest rates flirting with 30% (zoiks).

Annual fees, for the last decade or so relegated to the realm of those trying to establish or repair credit scores and unheard of to most ‘A-grade’ borrowers, are making a comeback. Lots of cards that used to carry no fees if the borrower didn’t carry a balance are now charging ‘account maintenance’ fees of $29-39, and the old cards that always carried those fees are cranking rates up, sometimes to the tune of $75 or more.

The final common change is to ‘perks’ programs – while these losses will hit affluent folks who can afford to pay off their balances every month and who tend to spend boatloads of money on their cards, they’re consumer disadvantages nonetheless.

Back to my Discover card – in the bad old days when I could actually afford to spend frivioulsy, they’d give me 2-5% cash back on my purchases – a way of sharing the wealth they took in transaction fees from merchants. Today, provided I’d have touched the card since my most displeasurable experience with their customer disservice department, I’d be getting 0.5-1.0%. My mom has a card that gives her airline miles when she uses it – this used to be a free bonus that the issuer used to entice her to swipe their card instead of a competitor’s, now she’s being asked to pay $39 a year for it. Benefits that were once advertised to “never expire” are now null and void if not used within a set period of time.

Okay, so what if you think this is a raw deal and you want no part in it? Well, another component of the revised law states that you’ve got the right to reject the changes – kind of. If you want to object to the creditor’s change in agreement terms, you have the right to state that you don’t agree to the change. You can then continue to pay off your account at the rate and terms you signed up for, and once your balance reaches zero the card issuer will automatically cancel your account.

However, if you make even one charge during the repayment period, that is considered an indication that you’ve reconsidered and have decided you’re okay with a higher rate or whatever – not just on the new charges, but on the entire balance of your account. If you do that make sure you aren’t signed up for automatic payment to a Netflix account, gym membership, or anything else like that, otherwise you’re burned. Also consider the impact of no longer having the open line of credit on your ratio of credit available to credit used and how that negatively impacts your score – if you close a zero-balance card but keep open a card with a balance, your ratio goes up and puts your credit score at risk.

The last change that took effect last week says that a creditor has to issue you a statement at least 21 days before it’s due, meaning that a bill that arrives in the mail Monday doesn’t have to have a check on the way to cover it by Tuesday. That’s nice, and I have yet to figure out how a card issuer could use that against you. If they’d figured it out, I’m sure I’d have an example by now of how it’s been done.

Look for another update sometime in the coming months – the consumer protections in the 2009 Credit Card Act take effect gradually between now and mid-2010. This is supposedly to ease consumers and creditors into the transition, though critics are arguing it’s giving creditors time (and incentive) to screw consumers before they’re legally prevented from doing so. Who’s got the valid point? Well…I report (admittedly with bias and cynicism heavily present), you decide.

{ 4 comments… read them below or add one }

annagrace August 24, 2009 at 9:22 am

PSD- thank you for shedding some light on what’s happening to so many people. (our home equity loan was recently “closed” by GMAC because the loan to value ratio of homes in the neighborhood makes everyone a potentially bad risk! And yes- the notification came before the new law was put into effect.)

You didn’t mention credit unions. My credit card is through a credit union and so far so good. Can anybody join a credit union? What should people look for?

This topic on the surface is not real touchy feelie, but the reality is that many people use cards for emergencies, or to buy inventory if they have a business or are artists. Without access to credit, which many handled responsibly, a whole bunch of people are now in a financial free fall- as in lose your livelihood, car, apartment, health.


Shawn Conrad August 24, 2009 at 3:38 pm

I had my limit dropped from $36,000 to $15,000. While I do not carry a balance on these cards, this lower balanced cuts into my loan sharking.

Thanks a pant load Visa!


PSD August 24, 2009 at 11:38 pm

Thanks Anna. The decreased ability for responsible borrowers to leverage their home equity through refinances and HELOCs is another topic entirely, but also worthy of discussion (maybe I can bore you to death on that in the next few weeks).

My credit union also jacked up my rate recently – from 9.99% to 10.09%. I brought this up in my conversation with Discover when they were trying to explain to me how rates were going up across the board, to no avail.
This is why I paid off all my bank card balances first and the only one I still (regretfully) carry is with the credit union.

I’m a big fan of credit unions and do almost all of my borrowing through a local one with a couple branches within a few miles of town, even though various savings and loans and banks have cut my paycheck for the last several years. Membership restrictions have been cut to the bone recently, basically the only membership requirements of most are to own a home, rent a home, hold a job, or attend a school in the same county as the credit union’s headquarters and to keep a $5.00 minimum savings account balance. My current employer has some killer auto loan rates that would beat out even most credit unions, but I’ve yet to see a major bank or S&L that can top what the CUs offer for credit cards, unsecured loans, or fixed-rate mortgages, though if you need one of those exotic “I’m trying to rape myself anally with a splintery broomstick,” loans euphamistically referred to as “creative financing,” you won’t find them at your local CU office.

And yes, the larger point is that many people that rely on credit are not necessarily irresponsible. The old saying “it takes money to make money,” is cliche, but true. Suppose you’re a craftsperson making jewelery to sell at local artisan fairs and farmers’ markets. You need a few thousand dollars’ worth of raw materials to create a saleable inventory. If you don’t have a few months’ operating capital to start your venture, are you supposed to give up your dream, sign on with some loan shark whose cut will be so high as to wipe out any profit you might hope to turn, or look to a local lender who’s willing to finance your venture while taking a fair cut of the profits (interest) in relation to their risk of capital while acknowledging your craft is what’s really creating the value?


annagrace August 25, 2009 at 9:44 am

Consumers get it coming and going. First we bail out financial institutions, which using those institutions’ own criteria, are themselves bad credit risks. And then those same institutions deny credit to us because there is a presumption of credit unworthiness, or simply because they can. They may be too big to fail, but it is grim to think that so many people have become too small to survive. There will be grave consequences if this continues.

Thanks for your response and the info on credit unions PSD. Seems like it would be worthwhile for a lot of people to look to them for credit needs.


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