Informed Speculation

The federal government today approved some much overdue reform measures aimed at predatory and just plain unfair credit card practices:

Calling many credit card company tactics “unfair,” “unreasonable,” and “deceptive,” federal regulators on Thursday unveiled sweeping new rules aimed at protecting consumers. They then invited card issuers to continue those unfair tactics for the next 18 months.

A 300-page report by the Office of Thrift Supervision described bank misbehavior in great detail, at times using stinging language. It then laid out updated federal regulations that will bar many such practices.

The new rules, for example, limit card issuers’ ability to raise interest rates in the first year after they issue a card. They also severely curtail banks’ ability to retroactively raise interest rates on consumers’ existing balances, including penalties levied when the a payment arrives a few days late.

And card issuers won’t be able to toy with “grace periods,” as they have in the past. Instead, banks must give consumers at least 21 days to pay their bills, and they are prohibited from double-cycle billing, which retroactively applies interest charges to purchases made after a consumer fails to pay their bill on time.

The Office of Thrift Supervision report uses the term “deceptive” more than 100 times in describing the banks’ practices and “unfair” more than 200 times.

So far, so good (in fact, very, very good).  So why the negative headline?  Read on:

But the three agencies cooperating on the rules — the Office of Thrift Supervision, the Federal Reserve, and the National Credit Union Administration — also gave the banks a generous grace period. The new rules will not take effect until July 1, 2010.

Linda Sherry, director of national priorities for advocacy group Consumer Action, hailed the rules as “great” for consumers, but sharply criticized the delay in their implementation.

“The fact that they are waiting 18 months in this economy is a disaster,” she said. “That will give the credit card companies time to reprice their consumers and do all kinds of tricks. (Regulators) should have made it much shorter.”

Exactly so: remember what happened, for example, when bankruptcy rules were tightened – people rushed to get a bankruptcy before the new rules went into effect.  That is just one example of a quite common and quite understandable law of human nature: when rule changes are made that have a negative impact on you, you rush to take advantage before the rule change takes effect.

The result will be entirely predictable (solidifying a trend that had already begun under the credit crisis): if you have any credit cards at all, you can expect that you WILL have your rates raised in a matter of months.  If they aren’t, then you can be pleasantly surprised.  And don’t think a good credit rating will save you:

It arrived in Rich Stevens’ mailbox a few weeks ago: the notice that Citibank had “rate-jacked” the Visa cards belonging to him and his wife. 

“In my case, from 9.5 percent to 16.99,” the 54-year-old nurse from the Long Island hamlet of Merrick, New York, told CNN. And his wife’s rate zoomed from 7.95 percent to 16.99 percent, he said.

Stevens said he did not know why the rates had soared; his credit rating is great.

But, like thousands of other credit card customers around the nation, he has been notified his rate is skyrocketing.

“It almost borders on loan-sharking, from my perspective,” he said.

So, yes, the new rules are great – and yes, companies must be given SOME compliance time.  But 18 months?  Ridiculous – chalk another one up to the financial lobby…