Regulations for credit card companies became much more restrictive because of new rules imposed by the Federal Reserve early last year. Those who follow the news probably remember all the benefits of the new rules as promised by Congress and the President. The regulations were aimed at forcing credit card companies to disclose more information and reduce the amount of money they collected from consumers over and above traditional debt.
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The 2010 regulatory changes were the most sweeping in recent history, affecting everything from how credit card companies earn money to how they prepare statements for customers. The rules were tweaked slightly through amendments added to the Dodd-Frank legislation of 2010. Yet even though Congress considered the adjustments minor, credit card companies claimed the total result of those adjustments, plus the original rules, would be extremely costly.
Reducing Fees and Other Charges
One of the most significant things the new regulations did was to prevent credit card companies from raising interest rates within the first 12 months of a new account being opened. There are some exceptions to this rule, such as accounts opened with a variable rate tied to an established index. If that index increases, the credit card company can increase interest rates in direct proportion. However, they are now required to inform customers 45 days in advance of any credit card interest rate changes, unless those increases are the result of one of the rule’s exceptions.
Another significant change comes by way of interchange fees. These fees are charged to the banks who issue cards by processing companies like Visa and MasterCard. The fees are assessed to help alleviate some of the risk the processors assume by allowing banks to issue cards under their brand. Putting a limit on interchange fees ostensibly should limit what issuing banks charge merchants, which should hopefully translate into better prices for consumers.
Whether or not the reduction in fees and other charges has a real impact on consumers is still unknown. Nonetheless, a 2011 report from the Boston Consulting Group estimates that the new rules could result in revenue losses of up to $25 billion annually. Banks and credit card companies are sure to make up those losses through other means including raising annual fees and reducing rewards programs.
Added Consumer Awareness
To make consumers aware of how costly credit card use is, credit card companies are required to publish on every statement information regarding how much time it will take the consumer to pay their debt and how much they will pay in interest over that term under new regulations. The Federal Reserve has published an example of what this reporting looks like in their summary of the new credit card rules.
Whether one agrees with this rule or not, it’s hard to dispute the fact that the information in such disclosures is alarming to people who do not truly understand the nature of credit cards. Using the example given on the Federal Reserve website, an individual with a $3,000 balance on a card carrying 14.4% interest would spend nearly 11 years paying off that debt if he made just the minimum monthly payments and did not make any more purchases on the card. Total interest over those 11 years would amount to more than $1,700.
Other Significant Regulatory Changes
The new rules contain several other significant changes designed to protect consumers. One of those changes is the elimination of the double billing cycle for credit card interest calculations. Under the old method, credit card companies could charge interest based on the outstanding credit card balances of the previous two months. This has been eliminated so that interest must now be calculated solely on the outstanding balance at the time the statement is prepared.
Along those same lines, credit card companies typically would apply extra payments to the lowest interest balances first, while interest continued to accrue on higher interest balances. This made it extremely difficult to pay off higher interest balances in a reasonable amount of time. The new rules have turned that practice upside down, requiring companies to apply any payments beyond the minimum to higher interest balances first.
Today it seems as though the American public is generally accepting of the new credit card rules. Only time will tell how the banking industry reacts, and what they do to make up for lost revenue. At the end of the day, the best way consumers can protect themselves is to make it a point of using credit cards responsibly and not overextended themselves.
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