Credit Reform Could Get You Canceled

Last Updated May 7, 2009 4:04 PM EDT

If you've checked your credit report lately, you might have noticed that you're not the only one looking. There's a very good chance that a bunch of your creditors have been scrutinizing your report too. That's because they're trying to figure out whether it's time to dump you, slash your credit limits or raise your rates.

That's not just because they're evil. It's because credit card reform is coming down the pike and lenders are looking for ways to reduce their risks, said Bill Hardekopf, chief executive of LowCards.com.
A little background
Until six months ago, the credit card industry was largely a Wild West, where the card companies could do just about anything, as long as they disclosed the possibility in dense legalese as part of their cardholder agreements. Harvard Law professor Elizabeth Warren dug into the practice and wrote a long indictment of the industry, which she said had altered its business model to earn profits based on tricks and traps rather than fairly disclosed charges.

Since then, the Federal Reserve Board announced plans to impose new rules on the industry to dramatically restrict the most egregious practices. Those rules go into effect July 1, 2010. However consumer groups such as Consumer Federation of America and the Center for Responsible Lending have continued to lobby for more. There are two reasons why. They want the rules to have the weight of law; and they don't want to wait another year for fair play.

New game
They appear to be getting their way. Last week, the House of Representatives passed the Credit Cardholder's Bill of Rights. Technically, this would also go into effect in July of 2010, but there's serious discussion about moving the deadline so the rules would go into effect as early as this year. This law largely mimics and strengthens the new Fed rules. If passed by the Senate and signed into law, it would:
  • require companies to give cardholders at least 45-days notice of a rate hike
  • give cardholders the right to cancel a card when their rate has been raised, and allow them to repay the existing balance at the old rate
  • demand that new rates only apply to new balances
  • prohibit so-called "double-cycle billing" which effectively forces consumers to pay interest on a balance that's already been repaid
  • require that billing statements are mailed at least 25 days before the due date (vs. 14 days in current law) to give consumers adequate time to pay
  • bar late fees for payments processed after an arbitrary cut-off time, such as noon. Any payment received before 5 p.m. on the due date must be considered timely.
  • when a cardholder has two rates--a promotional rate for a balance transfer, for example--and a higher rate for new charges, the law would allow the cardholder more control of how payments are allocated. (Current industry practice pays off the low-rate balance first.)
  • restrict some penalty charges for late payments and over-limit fees.
Careful what you wish for
The rules will eliminate many practices that consumers complain are deceptive and predatory. Some credit card companies are already changing their ways, said Samir Kothari, co-founder of BillShrink, which is keeping a running tally of how lenders are responding to the pending changes.

But couple these tightened standards with the current recession that's already making lending a dicey proposition, and you get other consequences, too: less credit and higher costs.

Right now, lenders have the ability to offer credit to virtually anyone at fairly low rates and then watch how they handle it, said Peter Garuccio, spokesman for the American Bankers Association. In any given group of 20, one person is likely to mess up. And, as things are, the lender can then penalize that one borrower with higher rates or higher fees. If that's no longer an option, lenders are likely to offer less credit and boost their rates for everyone to account for the risk of that one bad apple, he said.

"If you can't adjust pricing to respond to risk on the back end, you do it on the front-end," said Garuccio. "That's how it was 20 years ago, when everyone paid 18%."

Back to you
If you're a pristine credit risk, you don't need to worry. You'll still have access to plenty of credit. If you're smart, you're paying off your credit card balances each month anyway, which means rate hikes have no impact on you, either.

But you should know that creditors will be watching carefully for any missteps. Pay late, go over your limit or start using or applying for an uncharacteristic amount of credit, and you'll become the flotsam of credit card reform. Lenders have a year before the new rules take affect. Until then, they can raise your rates, cut your credit limits or cancel you. And they will if you seem even slightly sketchy.

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