Fed will reform credit card industry, but there’s a catch


Gregory Bean is executive editor of Greater Media Newspapers. You can reach him at gbean@gmnews.com. Gregory Bean is executive editor of Greater Media Newspapers. You can reach him at [email protected]. Ialways laugh at those movies where the loan shark sends out a leg breaker like Rocky Balboa to collect on unpaid debts.

In those movies, you get the idea that the loan sharks are always named Sal, and the people late with the payments are always downon their-luck alcoholic gamblers and degenerates named Mickey.

I’m sure people like that really exist, but what made me laugh was that in this country, loan sharking was not only legal, it was protected by the federal government.

The loan sharks were a lot of the credit card companies that threw out the temptation of easy money, and then enforced a predatory system of interest rate increases and collection that had a large segment of the American population in perpetual, lifelong servitude.

It’s been a modern version of the old company store, where people bought what they needed on credit, and then spent the rest of their lives paying it off. In many cases the debts followed them into the grave, and the company store went after their surviving family members to collect.

I’ve written about credit card companies a lot of times over the years, most recently about an ExxonMobil MasterCard that was issued to me, even though I didn’t ask for it.

I’ve noted that we get so many credit card offers at our house that in one two week period, we were offered more than $100,000 in credit card money. And I’ve also noted that if I were more of a reprobate myself, I’d just max all those cards out with cash advances and retire to Bora Bora under an assumed name.

Well, all that may finally be changing because in a fit of common sense, the Federal Reserve and the National Credit Card Administration adopted a fairly comprehensive set of rules to reform the national credit card industry.

The new rules were designed to increase protection for consumers and are too numerous to list here. Some highlights:

• Consumers must be given 45 days’ notice before any changes are made to the terms of the account. In other words, no raising the interest rate on the card on a whim.Also, no raising the interest rates because a consumer was late on a payment by a single day. They’ve got to be at least 30 days late and then rates can only be raised after that 45-day notice. Currently, card companies can change the terms of the contract arbitrarily with no notice. Under the new regulations, cardholders would have the right to cancel their cards and pay off the balance with the existing interest rate.

• Card companies will have to send their bill at least 21 days before the due date so consumers have time to make a payment without getting hammered by a late fee. Currently, credit card payments are considered late if the company does not process them by 5 p.m. on the due date, which meant consumers had to mail their payments several days early to make sure they were processed on time. Under the new regulations, if consumers can show proof of bill payment within seven days of the due date the company must waive any late fees.

• Credit card companies will no longer be allowed to increase rates because the consumer is late on an unrelated bill. In other words, these days if you’re late on your car payment, your credit card company can raise your rates just because they feel like it. No more.

• Credit card companies will have to provide consumers the option of having a fixed credit limit that cannot be exceeded. Currently, card companies will usually let you go over the limit, but they charge a hefty fee for that. No mas.

• These days, if you take a credit card company up on a promotion like “5 percent interest for one year,” the credit card companies can take your payment and apply it to that part of your debt. That leaves your balance with higher interest rates just growing and growing. This was good for the credit card companies because it extended the time you were in hock for higher interest rate balances. Under the new regulations, your payment will have to be distributed so that it pays off some of the lower interest rate debt and some of the higher.

Spokesmen for the credit card industry are already whining that these new regulations will force them to change their whole method of doing business and predicting that it will just make it more difficult for the average consumer to get credit.

Well, that’s the whole point, isn’t it?

Giving subprime mortgages to people who couldn’t pay them back and didn’t deserve the loans in the first place created a huge economic mess in this country.

And with the average American carrying between $8,000 and $9,000 in credit card debt and paying about $1,200 a year in credit card interest, this is nothing but a huge dam waiting for the crack that will send water rushing down the valley and drown us all.

(Did you know that if you charge $1,000 on an average credit card and make only the minimum payments, it will take 22 years to pay it off? Did you know that you will pay $2,300 in interest on that $1,000 initial balance?)

All things considered, these new regulations sound pretty good, right? Well, as usual there’s a caveat.

They won’t take effect until July 2010, which means the credit card companies can continue acting like old Sal the loan shark and preying on American consumers with relative abandon.

I’m sure they’re hoping that between now and 2010, they can mount a lobbying campaign to get the government and the Fed to back off.

Stranger things have happened, but I’ve got a feeling those lobbyists aren’t going to find the Democratic majorities in the House of Representatives and the Senate quite as eager to roll over as their “free market” Republican pals were.

So I think reform will come, but it’s too bad the Fed is putting it off for so long. If they really wanted to provide consumer relief, they would have made the reforms effective January 1, 2009. Sure, that would be inconvenient for the credit card companies, but we shouldn’t feel too sorry for them. They’ve been taking advantage of us for decades.