New Credit Card Rules - May 2009 Update

I wanted to take a break from answering credit questions to share some news with you. I've written before about the new Credit Cardholder's Bill of Rights and other credit card laws designed to protect consumers. Here's an update on these new rules that are coming soon.

Last month, this bill passed through the House Financial Services Committee with a vote of 48 - 19. Yes, sadly there were 19 representatives on the panel who sided with credit card companies instead of consumers (big surprise -- they were Republicans).

Yesterday, May 19, the Senate passed its version of the credit card bill by an overwhelming 90 - 5 vote. Next, the Senate version will be merged with the House version, and the resulting bill will be sent to President Obama for review and (ideally) signature.

President Obama has long advocated new credit card rules to protect consumers. If you recall, credit reforms were one of his key talking points during his presidential campaign last year. The President has challenged Congress to expedite the passage of this bill.

Here is a summary of what the new credit card rules will do:

• Credit card companies must give 45 days notice before changing a cardholder's interest rates. This is an increase from the current 15-day standard.
• They must apply customer payments to the portion of the card balance with the highest interest rate first. Currently, most of these companies apply payments to the low-interest balances first, which is obviously more profitable for them.

Be warned. The card companies are already rattling their sabers about these new rules, and they're practically making threats to consumers. It's a pretty safe bet that they'll start jacking up fees and using their other classic tricks to gouge customers.

Here's an example from my own experience. Citi recently hit me with a bogus late fee, even though I had confirmation of my on-time payment. They increased my rate by more than 17% as a result of this. Goodbye Citi bank ... I've already begun to transfer my balance, and ultimately to pay it off. Enough is enough.

New Credit Rules Will Bring New Tricks

Here's what you should take away this. As new credit card rules and laws are enforced, the card companies will do everything they can to compensate. I saw something in the news that claimed late fees and other penalties are a $20 billion / year industry. So you can be sure the credit card companies will come up with a whole new set of "tricks and traps" to compensate for the new rules being created. As a card user, you need to stay on top of this, and you need to keep a close eye on your own interest rate and terms.

The credit card companies have become addicted to a high-profit business model that is built around sly tricks. You would think they could get by with a simple interest-based business model, but that's enough profit for them. They make more in penalty fees than they do from straight interest -- so don't expect them to go quietly into the night.

They have become dependent on their consumer-gouging business models, so they will come up with new tricks to counter the new rules coming their way. You have been warned.