From Marketwatch
http://www.marketwatch.com/story/new-credit-card-rules-fail-consumers-2009-08-20Things were supposed to get better for credit card customers, beginning Thursday. That's when the latest law to protect the public from credit-issuer practices that are everything from annoying to unethical takes effect.
Yet, empirically speaking, it's clear that the unintended consequences of the new law are that credit issuers are unleashing trouble on unsuspecting consumers, and that the pace of change is likely to pick up.
As a result, the public will quickly learn the flaws of the Credit Card Accountability, Responsibility and Disclosure Act (widely known as the Credit CARD Act) -- the first provisions of which kick in this week.
For example, starting August 20, card issuers must give 45 days' notice before any rate hike. Alas, that only applies to fixed-rate cards, a loophole that most industry watchers say means that it won't apply to more than 90% of the cards issued; many issuers of fixed-rate cards have been converting them to variable rates in advance of the new rules. Another key provision going into effect is that card issuers will have to send out statements 21 days in advance of the due date, rather than two weeks ahead. See related story.
Closing the credit window
Advance notice is great, but a bit ironic considering that issuers can cancel your account and void your cards without any advance warning, needing only to notify you within a "reasonable time."
It's why countless consumers have experienced the personal horror of having a card rejected at the register, with their inquiries earning the lame answer of "Your cancellation notice is in the mail." (If you have not used your card in a year or more, the company is not required to send notice that it has closed your credit line; it may even have sent you new and updated cards -- a ploy to get you to start charging again -- only to cut you off after no activity in a certain time frame.)
"Everybody is pretty squeamish about risk right now, and card issuers are mitigating that risk by closing unused credit lines, cutting credit lines, changing terms on customers whose credit record has changed, and by raising interest rates while they still can," said Greg McBride, senior financial analyst for BankRate.com. "In many, many cases, they are doing this to consumers who have not set a foot wrong, people who have paid their balances every month, who don't have big balances, or who maybe haven't used their card in a while."
He added: "Once upon a time -- not so long ago -- these were the best customers a credit-card issuer could have, the ones they were giving big incentives to get; now, they are following a 'Ready! Fire! Aim!' approach and hurting people who were not the problem and who likely would never be the problem."
Card issuers have been using the rules changes as an excuse for tightening up, but the current contraction has been brewing for years, the inevitable backlash to the expansion of credit that recklessly fueled growth in the financial services business.
"The credit-card companies are showing their hand, showing that they used all kinds of tactics to get people to become customers," said Charles R. Geisst, author of the new book "Collateral Damaged: The Marketing of Consumer Debt to America." "The idea was to lure you to the card to make expenditures, and if you aren't using the card, if you are only using it for balance transfers, or if maybe you are using it a whole lot and making them nervous, then you aren't using the card the way they expected and they will take it away from you or cut your credit limit."
Score favors card issuers
Ironically, one other factor that may be at play here is a change in the way credit scores are being calculated. FICO 08, the latest version of Fair Isaac's ubiquitous credit-scoring system, is supposed to be more consumer-friendly, rationalizing the out-of-character delinquency, forgiving missed payments when there are many other accounts in good standing and so on. It could be that lenders are unimpressed with scores that increase under the switch to FICO 08.
Alternatively, one feature of FICO 08 is that it is more sensitive toward high credit usage. If every payment is made on time, but the reported balance on one or more cards is near the account limit, the consumer gets fewer points, which ultimately leads to less credit.
Ironically, these things can pig pile on the consumer. One card issuer cuts a limit, which means the consumer is closer to that edge, which in turn makes the consumer a worse credit risk. That could lead to another issuer to cancel a card, worsening the consumer's overall debt-to-available-credit picture, starting a nightmarish spiral.
The Credit CARD Act was designed to defeat several bad acts by issuers, including the "universal default" clause, where a late or missed payment to one creditor is sufficient reason for another lender to raise the effective rate they charge the same customer. By the time universal default is against the law when the rest of the Credit CARD act is in place in February, card issuers will have replaced it with an informal universal-cutoff policy, where any negative that hits the credit report becomes a reason to cut off a customer.
Adam Levin, president of Credit.com, notes that consumers should have a plan for times like these, and it may actually involve making sure they have an additional credit available now, whether by using an older account (if they can) that is still active or signing up for something new while they can get it.
"You always need to have the ability to make up the difference in your back pocket," Levin said, "so you need to ask yourself what you would do if one of your card companies cut you off or cut your credit limit. Your spending could remain the same, but you might suddenly have a problem, and the wrong time to try to fix that problem is right after you've just been cut off by one company."
Added Curtis Arnold of CardRatings.com: "The whole industry is turned on its head, and the bread-and-butter good customers of the past are the threats of today. Credit-card defaults are at historic highs, unemployment is nearing 10%, and card issuers are wondering what the odds are that you could run up a huge balance quickly if you lost your job. ... Everyone has to be more diligent and manage their credit very practically, because the next several months will be no bed of roses for credit-card customers."
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Awesome, chalk up another "Victory" for our glorious Congress.
We're saved!
