Tuesday, May 19, 2009

Government Protecting You From Yourself

So, the government has stepped into our free market once again. Now it is passing credit card reform legislation to help out the consumers.

WASHINGTON – The Senate voted overwhelmingly on Tuesday to rein in credit card rate increases and excessive fees, hoping to give voters some breathing room amid a recession that has left hundreds of thousands of Americans jobless or facing foreclosure.

The House was on track to pass the measure as early as Wednesday, paving the way for President Barack Obama to see the bill on his desk by week's end.

"This is a victory for every American consumer who has ever suffered at the hands of a credit card company," said Sen. Christopher Dodd, D-Conn., chairman of the Banking Committee. The bill passed the Senate 90-5.

If enacted into law as expected, the bill woul give the credit card industry nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet and let customers pay their bills online or by phone without an added fee. They'd also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased.



Now let's stop there for a moment. You want to know the only time I had an interest rate jump without notice before hand? The one time I was late with a payment. Yes, it was my fault. And, they even tell you when you sign up that if you are late with one payment, you will be hit with a higher interest rate. Yes, you really do need to read all that fine print before signing your life away.

Quoting from a little further down the article:

Bankers warned the measure would restrict credit at a time when Americans need it most. They defended their existing interest rates and fees on grounds that their business — lending money to consumers with no collateral and little more than a promise to pay it back — is very risky.

"What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky," said Edward Yingling, president and CEO of the American Bankers Association.

"It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate," Yingling added.


Wait, so the government helping is actually hurting? There's a surprise.

But it gets better. Look at this article from the New York Times.

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

As they thin their ranks of risky cardholders to deal with an economic downturn, major banks including American Express, Citigroup, Bank of America and a long list of others have already begun to raise interest rates, and some have set their sights on consumers who pay their bills on time. The legislation scheduled for a Senate vote on Tuesday does not cap interest rates, so banks can continue to lift them, albeit at a slower pace and with greater disclosure.

“There will be one-size-fits-all pricing, and as a result, you’ll see the industry will be more egalitarian in terms of its revenue base,” said David Robertson, publisher of the Nilson Report, which tracks the credit card business.

People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks.

“Despite all the terrible things that have been said, you’re making out like a bandit,” he said. “That’s a third of credit card customers, 50 million people who have gotten a great deal.”

Robert Hammer, an industry consultant, said the legislation might have the broad effect of encouraging card issuers to become ever more reliant on fees from marginal customers as well as creditworthy cardholders — “deadbeats” in industry parlance, because they generate scant fee revenue.


So those of us who do pay on time can say good bye to the free perks we've been getting all these years. Why? So the government can help out the rest of the country. Once again punishing the good to help the irresponsible.

As you may or may not know, I am an advisor in Personal Finance at Epinions. Basically, that means I read lots of reviews about finance stuff. You would not believe the number of people who sign up to complain about a service. And usually, the negative credit card reviews are the person whining because they weren't paying attention and got charged for it. I know that I can't over spend my limit and have to pay the bill on time or there will be huge consequences in the form of fees and increased interest. So I make sure I followed the rules.

And above all, I don't carry a balance. Yes, I am very fortunate to have a job and roommates to help with that. But you know what else? If I didn't have those things, you can bet I wouldn't be buying the DVD's and books I do.

See, once again this comes down to personal responsibility. People don't want to take responsibility for their actions. And the government seems to think they are right and it should protect people from consequences. And once again, those of us who do the right thing and are responsible are the ones who suffer.

5 comments:

mindy said...

Oh, great. NOT looking forward to this!! We are one of those responsible families that also reap lots of benefits from using our credit cards and paying them off. We get hundreds in cash back/gift cards each year. Maybe we can pray that this doesn't pass. Or else it will be time to go "Dave Ramsey" and start using only cash, huh?
Thanks for sharing.

Mark said...

After posting this, I did think "Maybe this is credit card companies way of trying to defeat the bill." So we'll have to keep a close eye on it and see what happens.

Brian said...

Mark,

There are parts of this bill that are logical:

-- The days of Citibank, Chase, Wells Fargo, etc. showing up the Student Center are over.

-- Student cards still will be issued, with lower limits, rather than what they have given in the past.

This bill really is about targeting companies like First Premier Bank, Plains Commerce Bank, Compucredit, First Bank of Deleware, Applied Card Bank, etc. Google those and see why.

The BEST customers still will get the perks. The banks are just toying around and trying to get people upset. If you are a good customer, you will get your rewards. Period. Even the automakers still have 0 percent deals for those with excellent credit.

They are raising interest rates, which is one of the first things that raised the ire of the Feds. They were raising interest to collect more from those currently carrying a balance. That is wrong. You signed for the purchase at a certain rate and the card company is being required to hold to that.

Much of this really is aimed at stopping predatory lending. Basically some of the companies above started it and now the big banks attempted to get in on the fun. Capital One has always been in on it.

I think you will see this as a good thing in the end.

Mark said...

Did you not read the quotes, Brian? The banks are talking about taking away the rewards from their best customers. No, they are talking about taking away our perks.

Now, I will admit this could be talk to frighten us. But being a business man, I happen to believe it.

And I bet that if you actually read what people signed when they signed up for stuff, they agreed to the terms they are now complaining about.

Brian said...

Mark,

The issue is this:

-- Many people that had great credit and the great cards are the same people how of of work. One people started having trouble paying, the banks decided to invoke "universal default." FWIW, this could be invoked just by missing your mortgage payment, even if you continued to pay your credit cards. Even the most ardent consumer advocates have taken issue with this.

-- The talk of eliminating rewards is just that. What the banks want to do is scare consumers into calling their elected officials to reject the bill (too late) or Obama (so he can veto). If the bill fails, the banks get to continue their tactics (and probably use this to do even more nutty things).

-- Many banks were exceptionally loose with credit for a long time. Now they want to tighten things up, by screwing everyone with crazy rates and silly fees. The Feds are saying no way.

-- The overlimit thing makes the most sense. Essentially, banks were approving transactions regardless of whether or not they took the card over the limit. If it did, they dinged the account. This can no longer happen, unless you opt-in. This is pretty much the credit card version of overdraft. My guess is that will be the next stop for the Feds ...

... My bank will keep processing transactions up to $500 overdraft (some banks are less, others are more). Basically, what the banks have done is created their own payday loan business and a very successful one at that. My bank only charges $20. A few big banks can charge $45 or more -- for EACH transaction. Some banks will give you grace (they won't ding you for up to $5 or so overdraft OR if you deposit within the same business day), but most will not. It is getting worse and the logic is seriously flawed (they choose to authorize the debit card/ATM transactions regardless, rather than merely declining them -- which is an issue for any automatic recurring transactions you might have).

You agree to arbitration too, but my understanding is that you can pretty much go straight to the courts if you so desire.

The reality in all of this is that the credit card companies started doing things that, even though people might have agreed to the terms, have predatory written all over them.

Today, your bank can raise your interest rate tomorrow. Now they have to give notice. The idea here is to give you more time to shop around, for a BT. The banks, as of now, do not want you to BT. They want to milk the money out of you first.

The other good thing was increasing how far in advance they need to send your statement. With a few of those banks above this has been a serious issue, but it is becoming serious with other banks too. If they can send it late, it can arrive late, and if it arrives late you will pay late. If you pay late, they make money (in more ways than one, until of course this bill takes effect -- no rate jack until you are heading for default after 60 days).

The Feds already made one change, requiring a higher minimum payment. That was smart. As it stood, many minimum payments were BELOW the interest. Now they are designed to pay the interest, PLUS at least SOME principal.

The reality is this:

-- If you DO NOT carry a balance, you have nothing to worry about.

-- There was talk long ago of punishing those that PAY IN FULL every month. Some banks already have started imposing high annual fees on the cards that Mindy describes (Southwest Airlines wants $60+/year, as do a few other airline cards).

-- If you really do PIF, get an Amex CHARGE card. Good at Costco. No interest. And, best of all, there are rewards (and some excellent benefits).