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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Saturday, February 20, 2010

New Credit Card Rules: an Update

New Federal rules on credit card rates and fees take effect Monday, February 22. You've surely been hearing about these in the press or perhaps from your own credit card companies. We last talked about credit cards here in early June 2009, right after the law was enacted which mandates these rules. It's obviously time for an update.

To review briefly, the rate the bank charges on your outstanding balance can't be hiked on you overnight. Indeed, if you're current in your payments, the rate on your existing balance can't be raised at all, just the rate they charge on your new purchases. Your rate can't be hiked if you're current on this card's payments, but you default on some other credit card or loan. If you get a new card, the bank can't raise the rate at all for a year. The bank must tell you how long it will take to pay off your current balance if you make just the minimum payment each month; they must also calculate for you how much you need to pay each month to pay off your balance in three years. In other words, the law, the Credit CARD Act of 2009, seeks to protect you from seemingly capricious changes in the terms of your borrowing arrangement.

There's more to this law and certainly more we all need to know about consumer credit and credit cards. The Federal Reserve has just inaugurated a new website to help ordinary people with those issues. Find it here: Check it out. Among other things, it has links to a credit report service and to the Federal Trade Commission's credit repair site. The latter includes a list of legitimate sources for low- or no-cost help in rebuilding creditworthiness.

Today's Wall Street Journal does note some cautions.* The new rules will not be a panacea; especially, they will not protect you from all interest rate increases or other charges. And like the airlines with their new baggage fees and other extra charges, there are clearly ways banks can still extract additional income: suppose, for instance, that you order online from a company in England. The Journal tells us that there can be fees not only for changing the foreign currency but for the non-U.S. payment processing. Balance transfers, often done free as a promotion to get you to change cards, may incur charges, as well. More broadly, some cards that presently have no annual fee may find that one is imposed. Finally, rates themselves may be higher across the board. Still, the new law should limit some of the more egregious, burdensome practices that have seemed to hit some borrowers' statements right out of the blue.

How are consumers doing with credit card debt? Well, they're continuing to pay it down. Really. The latest data from the Federal Reserve show that through December, "revolving consumer credit" was down $91.3 billion from December 2008; this is equivalent to just about $76 a month for every household in the country. The last monthly increase occurred in August 2008.

In the current economic environment, delinquency rates don't look very good, but through the third quarter of 2009, they've at least stopped getting worse. From an average of 4% or so during the mid-2000s, the Federal Financial Institutions Examination Council (FFIEC) reports that the amount of delinquent loans past due 30 days or more surged to 6.7% of outstanding balances in the second quarter of last year, then edged down to 6.6% in the third quarter. Clearly, at present, there's more risk in these loans than there had been, and if banks have tightened lending terms, we can hardly blame them.

What about the terms that are actually in place? The Fed gives us data on average rates, and they are higher. Finance charges ran about 12% of outstanding balances in 2008, but by late 2009, they were 13.6%. Some people, of course, pay off their balance every month and do not incur charges. If these are excluded, finance charges on accounts that do pay them amounted to 13.5% in mid-2008 and rose about a percentage point in late 2009 to 14.6%. Banks might also have been raising rates to get in front of the impending new regulations. It remains to be seen if rates might go still higher now.

How do we face these higher charges? That new Fed website has some advice for us in managing our credit, one piece of which we quote here: "pay your bills on time". This is the best way to keep our costs to a minimum, both in the short run and later on when we might want or need to borrow for some major project or event. For those of us in the Church, it might be a very significant Lenten discipline to work on our own personal finances in this way. As indicated here, we now have some new regulatory tools to support us in that work. And for everyone, this is a major way we can help the whole economy recover and move forward on a firmer foundation.

*Robin Sidel, "Credit Card Fees: The New Traps", The Wall Street Journal, February 20-21, 2010, Page B7.

The data we cite all come from USECON, an online subscription database compiled and maintained by Haver Analytics, Inc., New York. If readers would like to see the Federal Reserve's source data, email and we can direct you to the Fed's various statistical releases.

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