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I’ve been seeing a lot around the personal finance blogosphere about the impending credit card reform. Apparently this Thursday, Obama has summoned the CEOs of the major credit card companies to the White House to discuss unfair credit card practices.
Over the last few months, we’ve all heard about credit card companies lowering limits, increasing rates, and/or canceling cards altogether, especially on consumers who don’t carry a monthly balance. But lately, it seems this economy has them scrambling for even more ways to make a cheap buck. I’ve recently stumbled into two resources that I felt were worth sharing.
The first article that really caught my attention was actually a Yahoo video. Normally, I don’t give much merit to the short “buzz” video clips they post, as they rarely contain any substance. However, I was pleasantly surprised by Yahoo’s Sneaky Credit Card Tricks.
4 Ways Credit Card Companies Squeeze Out Extra Money
To summarize the video quickly reviews 4 different methods they consider “sneaky.”
- Retroactive Rate Increases – We are all familiar with that fact that credit card companies are raising rates even on cardholders who don’t default. This actually recently happened to my mother. But what some people don’t know is that some companies are going as for as raising rates on existing balances. Raising the rates of future purchases is one thing, but “retroactively” changing past rates on consumers who carry large balances seems a little fishy.
- Universal Default – Often times credit card companies will review the credit reports of customers who carry large balances. If they notice that the consumer has defaulted on other obligations they will adjust the rate to a “default” classification, even if the consumer has always paid the specific card on time. After first hearing about this practice, I did some further research. Apparently this provision is actually in a lot of credit card agreements. Of course, very few people ever read the agreement, let alone understand it (more later). If a credit card company did this to me, I would go absolutely ballistic.
- Lower Interest First – This one is actually pretty common and not at all new to this recession. This is when the credit card companies always apply a payment to the lower interest debt in situations where debt exists at multiple rates. The only time I’ve personally bumped into this was several years ago, when I did a 0% balance transfer. I transferred several thousand dollars onto a card that had a outstanding balance of around $300. In addition, I used the credit card for ongoing daily purchases. Whenever I made a payment, the money was applied to the balance transfer at 0%, even though I had older charges (the original debt) and newer charges (the daily expenses). Of course, both the latter were at 9% or so.
- Due Date Trap – I’ve never heard of this one before. As Yahoo explains, credit cards are shortening the amount of the “grace period” they are giving consumers. The “grace period” is the time in between the end of the cycle and when the payment is due. In addition, they are allegedly moving around the due dates in an attempt to cause consumers to accidentally miss a payment, thus tacking on late fees and higher interest rates. The video goes as far to claim some companies use daily cutoff periods that end in the morning, instead of at the traditional end of business day, to further catch people off guard.
For me, this is yet another reason why I hate credit cards. The last 6 months since we cut-up and canceled our credit cards has given me an awesome feeling of relief. Although stories like this often get under my skin, they don’t actually affect my finances.
Will these White House meetings actually change anything?
Actually, they might. The second article I wanted to share is from JLP at All Financial Matters. In the article, JLP outlines some potential changes that would take affect in July 2010:
• Banks can’t treat payments as late unless consumers have a “reasonable amount of time” to make the payment; at least three weeks before the due date.
• Banks must allocate minimum payments to balances with the highest rate first, or pro-rata among all balances.
• Banks cannot raise interest rates from the opening amount unless it’s a variable rate or an introductory rate with an increase disclosed in advance; or a year after the account opens, a 45-day advance notice has been made; or if a minimum payment is received more than 30 days after the due date.
• A ban on double-cycle billing, which allows banks to calculate interest based on a prior month’s balance in addition to the current month, even if the prior month had been paid off.
It will be interesting to see how well these new regulations will be enforced.
JLP spends the rest of the article pointing out that most of these practices are outlined in the fine print and that the responsibility should fall back on the shoulders of the people who blindly entered the agreements. I couldn’t agree more. I’m a huge advocate of personal responsibility and rarely ever side with people who constantly whine for the government to solve all their problems.
That being said, some of these practices are fairly sketchy. I’m also a huge fan of corporate transparency, which the credit card companies are obviously lacking. Ultimately, I think there is a certain balance to be found and I don’t mind the Obama administration taking a crack at locating it.
Check out the video and JLP’s article and form your own opinion. The silver lining in all of this is it makes me proud that we’ve personally achieved the ability the tell the credit card companies to shove it. Consider cutting up your credit cards and joining us.
What are your opinions on the regulations? Do you think these practices need to be cracked down on? Who will actually do the cracking? Who is to blame? Let everyone know below!
Interesting timing. Today’s post on my blog deals with a nightmare experience with HSBC. For some reason, it’s not showing up in CommentLuv, but here’s the link:
http://www.observingcasually.com/why-i-hate-hsbc/
kosmo @ The Casual Observer’s last blog post..Tale of the wolf: Part 2
I’m glad that some sort of reform may be coming to the credit card companies, as it also pains me to see how they take advantage of the people that could probably use the most financial help. Manipulation frustrates me.
Personally, however, I always pay my bill in full, and I pay it as soon as I receive the bill, so it is more difficult for them to take advantage of me.
Alan Schram’s last blog post..How to Repay Your Canadian Student Loan
I have yet to see any of those things happen to me but then again I pay off my balance each month or usually within a week or two and I have no other debt.
I think if someone does have debt they need to have their eyes glued to their statements to see any changes.
tom’s last blog post..Think big and kick ass edition of link love
DON’T CANCEL YOUR CREDIT CARDS! Just let them expire. When you cancel it actually goes against your credit (or so I’ve been told).
We don’t like CC either!
🙂
Sarah Mae’s last blog post..My Abortion Story
Sarah Mae has a good point. You don’t need to “cancel” them – just don’t use the new one… that said, I’d prefer to just get into the habit of paying in full each month – that might even annoy the CC companies more, since they can’t make any money off you.
MoneyEnergy’s last blog post..Goals on Fire: The Link Between Personal Finance and Positive Thinking
i think this is similar to me wanting to cancel my hotmail account. Apparently 120 days after it was been canceled, hotmail can reuse your account for someone else, which obviously can create problems for you because who knows what kind of emails can be coming to you.
Hence why it is better to just keep it instead of canceling.
tom’s last blog post..Think big and kick ass edition of link love
When I had debt, the credit card companies pulled all of these tricks on me. I still beat them. I really hate the due date trap. When I first signed up for my Chase card, I had a 30 day grace period. Over time, they fiddled with it and it is now 20 day grace period. Or so they say. It is actually 16 day grace period because they don’t process on Saturday or Sunday. In a digital world where bills are paid online, they still don’t count Saturday or Sunday as a valid payment day.
I don’t think credit card companies or other loan agencies should be allowed to change terms without at least 30 days notice. I don’t think they should be able to change terms on prior balances. If we’re a nation of contract law, then contracts need to be binding. We need to agree at the time of the contract on what the terms will be, then stick to it.
Cathy’s last blog post..Saving Money on Mobile Phones: Pay as You Go Plans
I’ve previously talked about some of the positives and negatives for closing accounts at https://manvsdebt.com/declaring-war-cancelling-credit-cards/
For us, the positives far outweigh the negatives. Earlier on twitter, Tom asked me whether I had noticed a drop in my credit score. I have noticed no actual drop in my credit score, although it’s impossible to say how big of impact this had. My credit score was and still is between 750-760. Maybe it would have gone up more had I not canceled (there is no way to know)!
Each situation is different and I’m sure some will be more affected than others. As I suggested in the previous post you need to way the positives and negatives for you!
Closing an account will only hurt you by reducing your debt to available debt ratio if you carry a balance. If you have no balances, cancelling accounts should not affect your score. It did not make a difference for me. After all the crap they pulled on me, I felt pretty happy about my letter ‘firing’ them. Even if there had been a drop in my score, I wouldn’t have sweated it. I’m not buying a house this year, and my next car will be paid in cash.
Cathy’s last blog post..Saving Money on Mobile Phones: Pay as You Go Plans
It also lowers you average account length, which has a small impact, as well.
Interesting. I would like to see if anything comes out of these pending meetings.
Trevor @ Financial Nut’s last blog post..“The Skinny On: The Housing Crisis” By Jim Randel – A Book Review
Credit cards are so dishonest and “gotcha” in their approach that it really is maddening. .. and I think this will ultimately lead to their undoing.
Not that I would ever advocate credit cards… I’ve learned of their ills the hard way… but they used to be pretty honest and straightforward. You didn’t have cash so you gained leverage by using a card. For that leverage you could pay later or pay interest and pay much later. A pretty honest trade by most counts even if self restraint was required.
However today they are in attack mode… delaying payment entries, averaging balance across periods, shortening grace periods… it’s all so gimicky now.
The honest exchange of money for time has eroded until now it’s a raw cash grab and frequently a hostile relationship. I don’t think the industry will go away, but they will collapse under their own weight and will have to reinvent.
As I move more and more to a cash basis… I think it’ll be fun to watch.
Thanks for sharing… those meetings in DC may be fun to track!
Dave
Do You Dave Ramsey?’s last blog post..Goal Setting – Household Goals (part 9)
Sad but true, all of these tactics are legitimate and detailed in the terms of agreement. Of course, you have to be a mouse or have a really strong magnifying glass to read the extremely tiny print and you will need a law degree to understand some of the concepts.
Thank you for pointing out that the onus lies with the cardholder to understand the terms. I fully agree. However the terms documents can intimidate even the hardiest of souls. Hence, I started a personal finance education firm back in 1996 to teach people how to decipher the legalese and processes associated with various personal finance issues such as credit cards, car loans, mutual fund prospectuses, mortgages, etc. Those of us in the know owe it to those around us who are confused to share our knowledge. I applaud for doing so through your blog.
Catie’s last blog post..Why should I get my credit report annually?
I noticed point number 4 in particular with one of my cards. It’s a pain for those of us who travel for a living, unless you pay your balance on-line.
These are all good points to ponder, and they add up to revenue for the credit card companies, who of course are trying to make money. Company programs that “search for the highest revenue” are common everywhere. That’s what a for-profit business is supposed to do.
I’m reminded of the scene in “The Jerk” when Steve Martin’s character finally figures out that it doesn’t matter if he guesses the age or weight correctly at the fair booth – people are paying a few bucks for the chance to win some worthless trinket.
“Oh, I get it. It’s a profit deal.”
Clair
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OK, I never thought I’d find myself feeling sorry for credit card companies, but after reading this post and the coments, I do.
I’ve had credit cards for at least 25 years and consider them a total blessing.
They save me time when purchasing compared to writing checks or counting out cash;
They allow me to buy online with ease;
They allow me to travel around the world without worrying about currency exchange rates and at least in my experience, give me far better exchange rates than I could get otherwise;
They give me a detailed record of my expenditures and often even provide a contact number for any vendor with whom I didn’t sign a receipt;
They allow me to pay them automatically by direct transfer from my bank;
They help me avoid carrying large amounts of cash that can be stolen or lost;
They give me a 1-2% discount on almost every penny I spend – a better rate today than I can get on CDs;
They save on postage, stationary and trips to the post office for mailing checks to pay my bills;
They allow me to make most recurring payments automatically and without any worry about anything getting lost in the mail, which would incur late fees or damage my credit;
They look out for possible misuse of my card. (Although I’ve never experienced any, I have a friend whose been called twice about suspicious charges that were, indeed, a result of identity theft);
In my experience at least, their telephone customer service representatives are uniformly polite, helpful, and authorized to do their best to take care of you (at least, if you’re a good customer). Back when I used to pay by mail, I did rarely get a payment in late, and if I called and pointed out how rare that was, I usually got the fee reversed.
AND THEY ARE WILLING TO DO ALL THIS FOR FREE, AS LONG AS YOU FOLLOW THEIR RULES AND PAY OFF THE CARD IN FULL EACH MONTH!!! I haven’t paid a nickel to a credit card company in years, and yet they continue providing me all of the above services on a DAILY basis, since between personal and business credit cards, I probably charge something at least once a day.
On top of all that, they are willing to lend you money quickly, conveniently and at much better rates for small, short-term loans than most of the available options, if you want to borrow money that way. (I don’t; for real borrowing, I don’t use credit cards, I use a low-rate (currently 3%) line of credit.)
So the simple solution is – pick one: 1) read and follow their rules, and therefore get all the advantages free, or 2) choose not to follow their rules, accept the advantages they offer but accept also that you have to pay for them, or 3) don’t use them.
What’s to hate?
Yes, they do make a lot of their money on people who don’t follow their rules, but that is probably why they can afford to provide me so many desirable services for free, so I, for one, hope that the so-called “reform” being pushed through isn’t just another example of rewarding irresponsibility by shifting its costs over to the responsible people.
It’s not like credit card companies or any lenders are in such great financial circumstances right now. They are barely able to function, much less are they rolling in dough. Every “consumer protection” will cost them money, and make it that much more likely that some will be forced to reduce services, raise rates elsewhere if they can, or if they can’t, go out of business, reducing competition and making services unavailable to customers whether they are responsible or not.
Not to mention that there’s a lot of irony about a bunch of politicians taking a break from raising tax rates and using the time to try to bludgeon credit card executives into lowering their rates.
Thanks so much for taking the time to contribute to the conversation!
I do agree with many of the benefits you’ve pointed out. It should be noted that I enjoy participating in most of them with my debit card. On the few that are specific only to credit cards, I’ve chose to sacrifice those benefits in favor of a credit card free life. My wife and I have decided we obtain far more benefit from using cash, debit, and not borrowing money at all.
Once again, I appreciate you shedding over 25 years of personal experience from the other side of the fence. It really helps add to the value for others!
He shoots, HE SCORES! Congrats on the Kirk Report link!!!
Ron@TheWisdomJournal’s last blog post..Don’t Ignore This Loan!
Thank for good articles.I am agree with you. but i see almost white collar have a credit card…
Credit Cards have their place. I think they are fine as long as you use them in moderation, are aware of all the terms and conditions, and pay them back in short order. When you have a good reputation for doing this with the company that issues it, they are far more flexible. In this way, you are in command of whats going on and not them. However, if you cannot control your credit, you will find yourself out of control and with them calling the shots much to your dissatisfaction. In this case, its always better to remain debt free.
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