If you have not seen the movie Fight Club, I urge you to do so. While there's a lot of crazy things going on in that movie that may not be to your liking or taste, there is one thing about that movie that every American should pay attention to -- the destruction of the modern American banking and credit system that takes place in the last couple minutes of the movie, all to a fitting song.
This a bit of a long read, but if you have even one credit card, regardless of whether or not you carry a balance, you need to read it...
This past Thursday, I intended to sit and type out an article, praising the current legislature and president for their credit card legislation bill. No, you read that right -- I am praising the current Democratic-controlled House and Senate and The Leader on a fantastic credit card reform bill that was signed into law last Friday. Again, you read that correctly.
It is going to cause some pain upfront, especially if you hold a balance on a credit card right now, but in the long run, it is going to benefit us all. It reigns back in the run-away credit that banks had been dolling out without any sense over the past decade, which is what led to their industry's collapse and subsequent socialist bailout by the American government to try to fix the failing economy.
While I will still tell you about this bill and still praise the lawmakers that wrote it and passed it, there was a surprise in my mailbox Thursday afternoon that turned this article into an attack on America's banks and credit card companies.
First, let's talk about the bill. Bottom line, it makes it illegal for credit card companies to raise the interest rate on a balance that you already owe them, unless it is a promotional interest rate. This means that days of you charging something on a card at a 9.9% interest rate and having them raise the interest rate the next month before you paid it off to 17.9% for no reason are over. The problem is, that if you owed them a balance the day the law went into effect, there is a still a work around the credit card companies have (more on that later), but any debt that you accumulate after the day the bill become law must always remain at the interest rate that you agreed to, as long as it is a standard interest rate and not a promotional interest rate. This is a great thing for the American consumer and is decades overdue.
The bill also gives your more time to pay your monthly bill from the time the credit card company issues it -- You'll now have at least 21 days from the day your statement is generated until you have to make the payment. It also restricts the credit card companies to having the cutoff before your bill is late be during their normal business hours. A lot of times, you'll get a statement and the bill is due on Sunday, when they are not accepting payments, but will consider it late if you pay on Monday. They also have been doing this for holidays as well. That practice is no longer legal. These are also greatly needed improvements to the credit card contracts and a great win for the American consumer.
Another great win, and one that the banks fought tooth and nail to try to leave out of this bill is the fact that any money you pay over the minimum payment must now be applied to the highest interest rate balance that you owe them. Before, the credit card companies would apply that money to the lowest interest rate. So, say you owed for purchases at 15.9% and owed a cash advance at 23%, when you would pay an extra dollar to the credit card company, they would apply it to the 15.9% balance, not the 23% balance, which obviously gave them a clear advantage in making more money off of you. This new legislation forces them to apply that extra dollar to the 23% balance first, and the 15.9% balance once that 23% balance is gone. This is going to cost them billions and billion of dollars in interest rates. No doubt the banks are going to lash out at the American consumer to make up for this gap of billions (again, more on that later).
Another area that is going to cost the banks billions is a change in over-limit fees. You will now have to "opt-in" to an over-limit fee, meaning that you must request that the bank allow you to go over your limit and charge you an over-limit fee for doing so. If you do not "opt-in" the bank will not allow you to charge over your limit, thus completely avoiding over-limit fees.
Another great benefit to the credit card consumer in this bill is the banning of what is known as "universal default". Under universal default, a creditor is allowed to raise your interest rate that you have with them if you default on any of your loans, even if it is not one you have with them. For instance, if you defaulted on a car loan, it would allow the credit card companies to raise your interest rate to their default rate, even if you had never missed a single payment with them. Universal default is now illegal and is going to save American consumers billions of dollars in the first year alone.
An area that is of less prominence in today's credit card war, but will still benefit the consumer, is that the credit card companies must compute your finance charges on the current billing cycle - meaning, charging you an interest rate on the current month's average balance as opposed to last month's average balance. This was designed to hit you one last time when you paid off a credit card balance. Say, in February, you owed $200 and paid that off. In March, when your statement cycled, with a $0 balance for each day that month, you would still be nailed with a finance charge on the $200 that you owed the previous month. The new legislation makes this practice illegal.
And lastly, while not effecting the actual agreement you have with the banks, the bill requires your statement to cite how long it will take you to pay off your balance if you are making just the minimum payments. I know most American consumers do not want to be reminded of that every month, but it will help you make better financial decisions when it comes to credit, I guarantee it. The statement must also show you how much you would need to send in order to pay off the entire balance in 12, 24, or 36 months, adjusted, of course, for additional monthly interest. This will give you a guideline in paying off your balances in a much more timely manner. You can image the grimaces in bank boardrooms all across the country over this one.
And that's the basics of the bill. It is a good piece of legislation and will benefit America in the long run, however, now, on to the "more on that later" part I told you about earlier. This will show you how the banks are going to try to get around this new legislation and legally continue to stick it to the American consumer.
Bottom line, if you owed $0 the day this legislation become law, you are set. You will know the day you charge something at a regular interest rate, that interest rate cannot be changed once you have completed your transaction. However, if you owed anything on a credit card the day this legislation became law, you are still in a fight with that credit card company until the day you pay that balance down to $0. In short, they will still be able to change the interest rate on the balance that you already owe them, and believe me, the credit card companies have known for months that this was coming and they have already gotten the ball rolling on getting around it. This is how...
Let's talk about one of my credit cards. A Capital One card I got in college with an original whopping $500 credit limit in 1993, that has a whopping $1200 credit limit today. This card has not carried a balance in over a decade and is one of the cards that I keep open solely for the purpose of having old credit lines open to benefit my credit report scores. It originally came with a 16.99% variable APR that after about five years was changed to a fixed 12.9% as my credit history and good payment record lengthened. That 12.9% was in turn lowered to an unheard of (for a credit card, at least) 7.9% fixed rate in April of 2008 - the true pinnacle of the banks' "credit for everyone" days.
Last Thursday, I received a notice regarding a change in terms on this credit card, literally the same day that I read the MSN article on the fact that the credit card reform bill was on the President's desk. So, the credit reform bill changes it so that a credit card company can only raise rates on existing balances if it is a promotional rate. The notice from Capital One said that they were changing the standard 7.9% fixed rate on my card, a rate I have had for over a year, and a card I have had for over 16 years, to a new promotional rate of 7.9% fixed. Do you see what that does for them? The new law says they cannot raise rates on existing balances that have a standard interest rate, but they can raise interest rates on a balance that has a promotional interest rate.
So, the bankers at Capital One not only changed my regular rate to a promotional rate which is exactly the same rate I had before anyway, but they have also done it to every Capital One credit card holder. Since all Capital One credit cards now have this promotional interest rate, after a period of time, which in this case is about 12 months (April 2010), they can then raise the interest rates on their customers' existing balances to whatever the hell they'd like. In my case, an increase from a 7.9% fixed rate to a 17.9% variable rate. Thank God I do not owe a balance on this card, or my interest rate on that balance would literally more than double to start with the option for them to increase it even higher than that.
So, while the new laws are fantastic, you can see that the credit card companies took steps to ensure that they had a new agreement with you prior to the new bill being signed into law. You can opt out of the rate increases by closing your account and your interest rate will remain what it was before the change, and you can pay them back in the same monthly installments that you have been paying them back in already, but you lose the benefits to your credit report for that account once it is closed. In my case, with this Capital One card, I would lose a card account that has been open for 16 years and has a perfect payment record.
So, what to do if you do have a credit card balance that the credit card companies are raising the rate on before the law goes into effect, or by skirting the law like Capital One is doing? You really need to weigh the long term benefits of the card being open and having a good payment record on your credit versus the amount of money that it is going to cost you to keep the card open if you are carrying a balance.
Keep in mind that your payment record will continue to be tracked, it just won't benefit your credit score as heavily because the account is closed. The bottom line always remains that if you are carrying balances on your credit cards, you should be paying them off down to $0 as quickly as possible. Be sure that you are paying the most on the credit cards with the highest interest rates. If you pay a card off, take your monthly payment for that card and add it on top of the monthly payment for the next card, this way you are always increasing the amount of credit card debt that you are paying off every month as your finance charges decrease. It is very easy to want to pay the minimum, especially as that minimum amount due shrinks every month.
You may have seen yesterday that I provided you with a list of the banks that received bail out funds. It was so that I could make this point to you today. What really ticks me off about the bankers at Capital One and a lot of these banks is that they are raising these interest rates on taxpayers within months of having received billions (yes, billions, such as $3.5 billion for the bankers at Capital One) in taxpayer dollars from the federal government. In what world, on what planet, in what dimension, is this in any way, shape, or form fair, or right? Well, just keep this in mind every time that you go to put a balance on a credit card...Fair has nothing to do with it, and in fact, once you are in debt to one of these newly socialized banks, they no longer have to be fair with you at all, even with this new credit card reform bill on the books.
If you have been reading my articles regularly in the past nine years, then you know that I have spent a good deal of time fighting to shed light on the mysteries and evils of the credit card industry. I will continue to do so in the future...
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