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

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.