The Federal Reserve, OTC, and NCUA Propose Amendments to Credit Card Rules

The Federal Reserve and other bank regulators are finally getting serious about cracking down on credit card abuse by the banks, proposing amendments to rules passed in December of 09.  The amendments prohibit hair-trigger rate increases and rate increases when an account has been closed or acquired.

Back in December, the Federal Reserve, along with the FDIC and the National Credit Union Association passed a series of credit card regulations that Ben Bernanke described as the most sweeping in the history of the credit card industry.  The rules, which were years in the making, came at a time when banks were hiking credit card rates in an almost indiscrimate manner

Amongst the additions to Regulation Z (the set of laws that help regulate credit lending) were the following:

  • Credit card companies cannot treat a payment late unless the consumer has been provided a reasonable amount of time in which to pay the bill.  Credit card companies must send a statement at least 21 days before the bill is due.
  • When a borrower maked a credit card payment above the minimum balance, the card companies must apply it either in entirety to balance with the highest interest rate, or must divide it pro rate amongst the various balances.  They cannot use the amount ot pay off the lowest interest rate balance.
  • Banks must advertise all of the potential APRs carried by a credit card and cannot increase the APR unless they specifically state what that increase might be - at account opening.  This does not apply to accounts that are marketed as variable rate but does apply to fixed rate cards.  Banks can increase rates after a promotional period, as long as they advertise what that new rate will be when the promo period ends.  Once again, this must be done at account opening.
  • Credit card companies are also prohitibited from applying finance charges to prior month balances that were covered by a grace period that expired.  As an example, if a grace period ended at the end of March, comapies cannot apply interest to those balances for the April billing statement, even if it covers part of March.
  • Banks cannot charge opening fees and then finance them if those fees in the first year consume the majority of the available balance on the account.  Banks cannot open a card with a $200 credit limit and have the consumer finance an opening fee of $150 on it.

Taken as a whole, the new regulations help to provide more protection to consumers.  Now, consumers have to help themelves by not purchashing more than they can afford, and by finding the least expensive and lowest rate credit cards.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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Credit Card Protection Plans: A Good Idea For Consumers?

Credit card issuers now seem to be placing more emphasis on offering insurance or payment protection plans for people that carry a balance on their credit card. In this time of uncertainty about one's employment and finances, these offers with their appealing advertising may seem like good financial protection, but the benefits are not worth the cost.

Credit card issuers now seem to be placing more emphasis on offering insurance or payment protection plans for people that carry a balance on their credit card. In this time of uncertainty about one's employment and finances, these offers with their appealing advertising may seem like good financial protection, but the benefits are not worth the cost.

Credit card issuers advertise these protection plans as a way to have peace of mind during unexpected life events such as death, unemployment and disability. Or even during happy events such as marriage, having a baby or moving into a home. One issuer even promotes these plans by stating, "you and your account payment history are protected so you can focus on more important things."

"These protection plans sound like a good idea, especially during these tough economic times. But in most cases, these protection plans are a bad deal for cardholders and should be avoided," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "These plans are targeted to customers who can least afford them."

The cost of the purchase protection varies by carrier. It ranges from $0.50-$0.99 per $100 that you carry as a balance. If your balance is $10,000, the protection plan could cost almost $100 per month or $1200 per year. "If you carry a balance on your credit card, the monthly cost of the plan is added to your balance and you have to pay interest on it," says Hardekopf. "These plans are another way for issuers to increase their revenue."

There are better safeguards than purchasing a credit card payment protection plan. If you already have life insurance, that plan may cover your debts after death. If you have a major life event which leads to difficulty making your payment, contact your issuer and try to work out a payment plan.

"If you have the money to pay for the protection plan, it would be a better idea to use that same money to pay down your balance. You will save yourself a lot of money in interest and pay off your balance much faster," says Hardekopf.

The plan is appealing to some people because if you have a qualifying life event, it freezes your account so that it stops interest accrual and the minimum payment is made until you are able to work again.

If you are considering a credit card payment protection plan, read the fine print. Credit card protection plans don't follow the same rules as traditional insurance. It is the consumer's responsibility to be familiar with the requirements and exclusions of these plans.

Consumer tips with credit card protection plans:

* Look for time limits and exclusions. Payment periods vary by the reason you need them.

* Examine the age requirements since many have a maximum age limit.

* Look for employment requirements.

* Ask the issuer what situations will it pay for? What situations aren't covered?

* Will the plan cover your spouse or supplementary cardholders?

* What happens if you miss a payment or if your account isn't in good
standing when you file a claim?

* How and when can the policy be cancelled?

* Before purchasing, be aware of exactly what you are getting and how much it will cost.

If you are close to your credit limit, or have a history of late payments on your card, you may have trouble qualifying for such a plan. If you are currently unemployed, you will not be eligible. Most issuers require that you be employed for 30-90 days before enrolling, and you must be a full-time employee.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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AmEx and Other Cards Dropping Limits And Hurting Credt Scores

American Express, Chase, Citibank, and other credit card companies are dropping credit limits which could in itself lower your credit score.

American Express, Chase, Citibank, and other credit card companies are dropping credit limits which could in itself lower your credit score.  How does that work?  If you have a balance on your credit card and the limit is suddenly dropped, your loan to limit ratio increases.  The ratio measures the amount of your credit limit you are using.  Credit rating agencies use that ratio to help determine your credit rating.

Even if you have had stellar credit and paid your bills on time, you could see your credit score decline if your limit is suddenly cut.

What can you do in this case?  The best thing to do is to lower the balance you are carrying on the card by paying of debt or moving the balance to another lower interest card.  But don't cancel your card out of anger.  Cancelling a card, even one with a lower balance can also impact your credit score.  Remember, the credit rating agencies use the ratio of total debt to your credit limit as one factor in setting scores.  If your total limit declinces because you cancelled a card, that will lower the score.

These moves will only serve to reinfoce the growth in savings as consumers reject credit and rebuilt their personal balance sheets.  It's no wonder the US Savings rate hit a 14-month high of 5% last month.  The banks don't seem to want to make it easy to spend and consumers are wisely taking the cue and saving.  The loser in all of this are the retailers, car companies, consumer electronics companies, etc. that are seeing spending slow. 

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.