In a historic move on Dec. 18, 2008, the Federal Reserve Board approved credit card rules which prohibit double-cycle billing, universal default and arbitrary interest rate increases.
On “Greek,” a television series dealing with college life, a student named Ashleigh (Amber Stevens) tried to solve her financial woes by applying for a student credit card. On-campus recruiters made it all too easy for her to get an instant line of credit, and when Ashleigh quickly maxed out her card; the bank simply doubled her credit line.
Predatory lending practices like these led the Federal Reserve Board to recommend some sweeping credit card industry reforms in May 2008. Although the FRB recently approved these regulations Dec. 18 to provide credit card help to consumers, they won’t go into effect until July 1, 2010.
New Credit Card Rules for Lenders
Within the next 18 months, banks and other lending institutions will have to adhere to the following guidelines:
No More “Double-Cycle” Billing
Most credit card users carry a balance from month-to-month, but some lenders were charging interest based on the previous two billing cycles. Unless you paid off the balance on cards like these, each month, the lending institution could charge interest on a balance you already paid. The Fed’s new rules will put an end to this “double-cycle” billing.
Interest on Credit Card Balances
Even with a good credit score and an excellent payment history, credit card companies could arbitrarily raise the interest rate that they charged on existing balances to as high as 29 percent. The new credit card rules approved by the FRB will only allow interest rate increases if a payment is over 30 days late.
Reasonable and Fair Payments
In order to avoid a penalty, you sometimes have to immediately mail a payment to the credit card company. The Federal Reserve’s new credit card rules make sure that cardholders have a reasonable amount of time to make a payment.
Universal Default
In the past, creditors reserved the right to review your payment history on all your credit cards, raising your interest rate if they saw late payments or defaults on other cards. The Fed’s ruling eliminates this policy, which is known as universal default.
The Negative Side of Credit Card Help
Because banks, credit unions and other financial institutions have 18 months to get in compliance with the Federal Reserve Board, they have plenty time to make up for the revenues they stand to lose once the new guidelines are in place. It’s possible for credit card issuers to raise their interest rates for all consumers, not just applicants with low credit scores.
For college students graduating after July 1, 2010, the reforms also could have a negative impact. In an article written by CNNMoney.com staff writer Jessica Dickler, American Bankers Association spokesman Peter Garuccio said that low introductory offers and zero-percent balance balances are likely to be scaled back.
Safeguarding Your Credit History
Like a resume, your credit history tells a lender about both your spending habits and your ability to repay your debts. Even with the FRB’s credit card help on the horizon, it’s important to use common sense when applying for a credit card, especially if you are an undergraduate:
· Make sure to read any application for credit thoroughly, double checking things like late fees and how much your interest rate can increase if you miss a monthly payment.
· Use your card wisely and don’t pull out the plastic for things like beer and chewing gum, as Ashleigh did on “Greek.”
· Sit down and work out a budget, which should show how much you can afford to pay on your credit card each month.
