In early May the Fed issued several new proposals designed to protect consumers by restricting various credit card billing practices and requiring more clarity in disclosure of costs. The US Federal Reserve Chairman, Ben Bernanke, stated the proposals are "intended to establish a new baseline for fairness in how credit card plans operate. Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs." Is Bernanke suggesting that consumers should actually know what something could potentially cost before they make the decision to accept the cost? What a novel idea! Considering we are a country drowning in debt, perhaps we should be happy the Fed is finally stepping up to help out the average Joe? But are their actions too little too late? Before we answer this question, let us first explore a few of the primary reasons consumers are really the ones ultimately feeling the pain of the credit crunch.
How we got ourselves into this mess
The crisis in the mortgage market last year forced lenders to tighten underwriting standards and crack down on home equity loans as well as other forms of credit. Consumers' inability to access home equity has driven many to use credit cards as their primary source of easily accessible credit. Therefore, credit card debt rose while the looming recession forced many cash-strapped consumers into delinquency at the same time. Investors in credit card debt do not like it when delinquencies rise, so they began to pull funding and the credit card companies found themselves in a difficult position. The increase in delinquencies and simultaneous loss of capital support forced them to tighten underwriting standards and start looking for ways to increase revenue through higher interest rates and fees. In the end, the consumer is the one who pays the price.
It may be too late, but at least it's a start
So, what will the Fed's actions possibly do for you? A summary of the proposed regulations is as follows:
- Prohibit credit card issuers from raising annual percentage rates unless certain exceptions apply, such as missing a minimum payment by the due date
- Require issuers to provide a more reasonable amount of time to make payments. Statements would have to be mailed at least 21 days before the payment is due as opposed to the current 14-day limit
- Prohibit double-cycle billing, which is a tactic used to compute finance charges based on balances in billing cycles preceding the most recent cycle
- Require credit card companies to use a portion of your payments to pay down high-rate balances instead of only applying the payment to debt associated with the lowest interest rate
The proposed changes may be long overdue, but at least they are a move in the right direction. Of course, nothing is finalized quite yet. We are in the midst of a 75-day comment period during which the credit card companies and their lobbyists will be working around the clock to make sure they get their way. Shouldn't your voice be heard as well? Click here to read the Fed's press release in detail and deliver your comments online.
