Saturday, August 29, 2009

Community rating and credit card laws

I have a rewards credit card that pays me back in cash. I pay the balance in full every month, which is the only way to profit from a rewards card.

In Singapore, rewards terms are far less generous than in the US. Singapore's banking sector isn't as competitive. However, Singapore also has far more restrictions on credit than the US. Some might say that's paternalistic, but the upside is that people don't get into as much trouble. And face it, Americans are in a lot of trouble with plastic.

I've previously talked about the concept of community rating in health insurance. In community rating, everyone is charged the same price. Modified community rating means you're allowed to vary the price by some demographic variables like age, but not by health status. Experience rating means you charge by health status, and this is one of the big things that causes harm to people. We should get rid of experience rating in health insurance. The flip side is that as a young healthy man, my costs in the private market will rise. I can deal, but I've heard some conservatives complain that this is wrong.

It turns out that the US is moving somewhat away from pure experience rating in credit cards. Morningstar has a good summary of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009. "Supporters of the bill argue that the new law ... is an important step in protecting consumers from profiteering credit card companies. Critics, however, contend that the new regulations will punish responsible card users for others' shortcomings."

As of Aug. 21:

Issuers must provide 45 days' notice before changing fees or interest rates. Previously, only 15 days' notice was required.
Issuers must send the bill at least 21 days before the due date. Payment may not be due before 5 p.m. or when the business is closed. Previously, the bill only had to be sent 14 days before the due date.

Consumers have the right to opt out of interest rate and fee increases--they can cancel their accounts and pay off the balance at the original rate. Before, this option was only available at the issuer's discretion.

After Feb. 22, 2010:

Issuers cannot raise interest rates on existing balances, except under these conditions: 1) a promotional rate expired; 2) another rate to which the interest rate was indexed increases; 3) a payment is 60 days late. If the bank raised rates after a late payment, it must restore the lower rate after six months of on-time payments.

Issuers can raise rates on new balances at any time, provided there is 45 days' notice.

Issuers can no longer raise rates because a customer failed to pay an unrelated creditor.

Beyond the minimum payment, issuers must first apply payments to the balance with the highest interest rate--for example, to the cash advance rate before regular interest rate. Previously, issuers applied payments to the lowest interest balances first.
Customers can opt out of over-limit fees so that transactions over their credit limit will simply be declined. Creditors must notify customers of this option annually. Issuers may not charge more than one over-limit fee per billing cycle, and cannot charge for going over the limit due to a fee or interest charge.

"Double-cycle billing," in which card companies based finance fees on the previous cycle's balance in addition to the current balance, will end.

Marketing contact with college students will be limited, and students under 21 must prove they have sufficient income, have a parent co-sign, or take a certified financial education course to quality for credit.

As to the law's impact, this is what Morningstar thinks:

Ultimately, we think both supporters and detractors have valid points. The bill does address industry practices that run counter to consumers' interests. But in doing so, the new laws will reduce revenue for the banks--that shouldn't come as a surprise, as the bill is designed to protect consumers from practices that issuers use to make easy cash.


Will the new regulations help consumers navigate their credit agreements and avoid exorbitant and sometimes unexpected charges? We think so. Will it mean more annual fees across the board, even for people who have never run into problems with the credit industry? It's certainly possible.

They've produced fairly balanced analyses of several issues related to business, and their industry knowledge is considerable. I'd definitely trust this analysis. On balance, consumer advocates might not have got all they wanted, but perhaps that's politics. Additionally, the use of credit cards is extremely ingrained in the US. In any case, there's certainly no reason to worry that this will be onerous on banks and credit card companies.

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