My Credit Card Law Analysis

So Congress is passing new credit card legislation. Some of the ideas in it are good, and some of them are bad. Some of them will help lots of people. Some won't. A few provisions will help some poor people and hurt some rich people. Other provisions will protect some poor people and hurt some other poor people. Here's PiFry's Guide to Congress's Credit Card Legislation Rush Job. Whether you're trying to form your own opinions or sound impressive at the watercooler, this primer of a few salient points should help. Feel free to add your own ideas in the comments.

PROVISION: Banks must send out credit card bills no later than 21 days before payment is due.
RATING: Pretty Good
ANALYSIS: This prevents the old trick of mailing a bill late in the hopes of being able to charge late fee. That trick is unethical and abusive, and 21 days builds in enough time to account for two envelopes making their way through the postal system, plus ample time for the bill payer to get the money together to pay it. Ideally Congress would just outlaw the unethical tactics, but intent is so hard to prove and even harder to monitor, so a day count is the best way to go. I'm not crazy about such a stiff and inflexible regulation, but I honestly can't think of a better way to do it.

PROVISION: Banks generally must wait until a payment is 60 days late before charging the higher penalty rate on outstanding balances.
RATING: Unnecessary, annoying, and too restrictive
ANALYSIS: Why 60 days? Why not 2 months, which would be anywhere from 59 to 62 days? Why not 59 days? Why not 49 days? This is an arbitrary and unnecessary cutoff. If a payment is late, the previous provision kind of ensures the person is actually delinquent and not caught in some trick. I understand allowing some grace period for something like a medical emergency or being stuck in an airport someplace, but 60 days seems excessive. A 30 day limit might help people who need it, but a long 60 limit just lends a helping hand not to the poor, but to the irresponsible. Credit card companies may try to make up the profits elsewhere at the expense of more creditworthy customers, which violates a fairness principle I think most Americans hold when it comes to markets. (As an aside, this regulation could also be bypassed by a penalty scheme that's still legal and yet more complicated and esoteric--kind of the exact opposite of the direction in which this bill is trying to push things.)

PROVISION: 45 days mandatory notice for an interest rate change
RATING: Often good, sometimes annoying
ANALYSIS: It makes sense to require enough notice of changing rates to allow them to plan accordingly. This prevents some abuse. That said, it also rules out cards for consumers who might WANT a frequently-changing rate. If a bank wants to issue a card with a fluctuating but lower-on-average variable rate (or a consumer is willing to trade a fluctuating rate for something more important to them about the card), this will restrict consumer choice. I don't like that, and it potentially costs society some real value. I think there should be some exceptions in the final draft of the bill (I'm not sure if they're talking about it or not).

PROVISION: If a consumer's payment is received by 5PM on the due date, the payment is on time.
RATING: Awesome
ANALYSIS: The only thing this does is prevent a company from screwing with customers by putting a mid-day or early-morning deadline in the fine print. No more charging late fees for having a payment arrive with an afternoon mail delivery, and no more late fees for the postman getting caught in traffic.

PROVISION: Banks will now require customer permission before charging that customer a fee for exceeding their credit limit.
RATING: Very good
ANALYSIS: Currently, a bank can automatically charge a high fee every time a consumer goes over his or her limit (accepting the new charge). From now on, the default will be for limits to be actual limits, and charges will be declined unless the customer gives the bank permission to charge an outrageous fee for a temporary bump of the credit limit. Only downside is for the consumers who don't know they're at their limit, haven't authorized such a fee, and really really really need to charge whatever they're trying to put on their card. But you can't have your cake and eat it too.

PROVISION: When carrying multiple types of balances on the same card (with different rates), banks must apply payments to the highest interest portion of the balance first.
RATING: Very good
ANALYSIS: It was an old trick to say "0% interest for balance transfers!" and let someone put $6,000 on a new card that had a 24.99% rate for everything else. Then even if the customer was responsible and spent $100 the first month while paying $200 on the bill, the credit card company would say "OK, you now have $5,800 outstanding on the balance transfer and $100 outstanding on which you owe 24.99% interest." It was basically a trap to roll all the new spending into a very high interest loan until they paid for the balance transfer. There were tons of these tricks, and now they'll be illegal. Good for consumers--especially less savvy ones--and bad for credit card companies (who will probably take it out on customers like me who always pay off everything). The downside to this comes up when a consumer would want to pay the lower-rate balance off first, though such situations are hard to think of outside of contrived examples.

PROVISION: Promotional rates must last at least 6 months.
RATING: Terrible
ANALYSIS: Promotional rates are marketing. As long as the duration of the promotional rate is made clear from the beginning, we shouldn't force companies into using specific types of marketing offers. This kind of invasive micromanaging helps very little and bans (or makes more difficult to provide) all sorts of offers which could, if used correctly, be very beneficial to consumers. A plain-English disclosure requirement would work much better here.

PROVISION: Issuers can't raise the base (non-promotional non-penalty rate) for a year after issuance.
RATING: Meh, whatever
ANALYSIS: This one probably isn't a big deal in the long run; it does offer some protection; and the above regulation allows the effective rate to change once (promotional to non-promotional), but seriously, let the market decide this kind of thing. If we're requiring 45 days written notice for a rate change, how necessary is this? On the other hand, it could prevent someone from having to change credit cards a lot, which would reflect negatively on their credit rating...in analyzing this I reach an indifference point.

PROVISION: Certain pieces of information will have to be disclosed in plain English and written in 10-point font or bigger.
RATING: Awesome
ANALYSIS: Disclosure regulations are good. Disclosure regulations which mandate important information be presented in a legible and understandable format are even better. These kinds of information include everything from expiration dates on gift cards (and similar devices) to how much it would cost to pay off a balance making the minimum payments. Useful information for consumers presented clearly. Fantastic. Nine thumbs up.

Finally:
PROVISIONS: Young people and students are going to see a very different landscape in a lot of ways. I'm getting conflicting information on what this will entail.
RATING: Hard to say right now, but it's looking worriesome
ANALYSIS: I've heard a lot of reports floating around, but generally it seems like the little ideas are good and the big ideas are bad. Little ideas include more disclosure on relationships between colleges and card issuers and banning certain marketing practices like a university-endorsed booth offering frat boys a free slice of pizza if they sign up for a credit card. Big ideas include forcing parental cosigners for young people, and parental consent for increases in credit limit. My big problem with this: how are young people supposed to develop good credit on their own? Having a credit card was very helpful to me in college in developing a credit history, and it's saved me a lot of money over the years. Those who have their own income can apply for a waiver, but the cutoff age being talked about is 21. This means for 3 years a full American citizen who isn't a minor will be treated like a second class citizen. 21 is a rare age limit, and we use it for things like drinking due to all the extra drunk driving deaths. Is a credit card really that dangerous? Some would argue yes, but they'd be equivocating, and this doesn't sit right with me. This could help protect some, but also hurt and inconvenience a lot of people.

That's the end of my primer; I have to go do other things now. Hope it helped. One last note: I'm hearing a lot of talk about how the credit card companies will jack up fees and cut benefits for responsible card holders to make up the difference...I'm not sure how true that is though. I'm sure we'll see a little bit of that, but at the same time, if credit card companies have to make more money on regular business and less on fees, they may be competing even more vigorously for the big-spenders (after all, the companies do get a percentage of EVERY TRANSACTION that takes place on the credit card as well). I think the effects may cancel each other out, by and large.