Credit Card Musings

Posted by Anthony Demangone

Someone forwarded this interesting article to me from the Wall Street Journal.  I take exception with the headline, "New Credit-Card Tricks."  Anytime someone from the financial industry adapts to a new set of rules, such as the Credit CARD Act, they are playing "tricks."  I guess that's life.  In any event, here's something that caught my eye:

The Card Act also stipulates that issuers can't jack up rates on existing balances unless a cardholder is at least 60 days late. But there is a creative maneuver around that: the so-called rebate card.

Citibank rolled out rebate-card offers to some of its customers last fall, offering to refund up to 70% of finance charges when customers pay on time. The problem: Rebate offers aren't governed by the Card Act, and an issuer can revoke them suddenly and hit cardholders with high charges.

The net result is the same as raising rates—and because it is perfectly legal, customers have little recourse. "Rebates on finance payments may seem like a good deal, but you could end up with a very high interest rate suddenly," says Mr. Frank, of the Center for Responsible Lending.

"The rebate offer is clear, transparent, and we believe fully within the spirit of the Card Act," says Citigroup spokesman Samuel Wang.

So, while the Credit CARD Act and resulting Reg Z changes make it difficult to increase rates on purchases and existing balances, there is an argument that it does not cover such "rebate" features.  Food for thought.

The WSJ article also serves as a good reminder.

1. Major newspapers have financial journalists.  They give advice and/or write articles that point at perceived abuses by financial institutions.  This article notes how consumers with credit cards can improve their lot by calling in to "fight back" and "raise hell."  That's why it is wise to read local newspapers.  Your members will read them, and they'll react accordingly.
2. Journalists love a good story.  This article talks about a gentlemen with a Discover card who had his interest rate increased in a way that he thought violated the Credit CARD Act.  At the end of the day, the bank didn't violate the Act. But he's still in the article, and the WSJ contacted the bank directly.  They ended up reversing the fees and interest rate increase.  Consumers who feel wronged will sometimes reach out.  There's not much you can do to prevent that, but you should always remember that it is a possibility.

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On a semi-related note, here is a wonderful blog post written by Professor Don Boudreaux of the George Mason University.  Professor Boudreaux writes numerous "letters to the editor" that challenge statements and statistics that fly in the face of reason or sound economic theory.  This one was a beauty, and it was written to the Wall Street Journal.

You’re correct that the Credit Card Accountability, Responsibility and Disclosure Act of 2009 will discourage lenders from extending credit to households most in need of it by arbitrarily reducing the penalties that lenders may assess against dead-beat and delinquent debtors  (“The Politics of Plastic,” August 24).  Our Leaders, though, cling to their peculiar faith that regulations never create incentives for people to do what Our Leaders would prefer people not to do.

Let’s put this faith to a real test: Ask Congress and the White House to regulate more strictly the penalties assessed by the IRS against dead-beat and delinquent taxpayers – for example, let’s reduce fees and interest charges for late payment of taxes, and eliminate jail time as a punishment for tax evasion.  If Our Leaders’ faith is sound, there will be no increase in tax evasion and delinquencies.  Revenue collected by the IRS will be unaffected.  The IRS’s stiff penalties will be seen to have been unjustified because (if Our Leaders’ faith is true) these penalties do nothing to encourage timely and full payment of taxes.

Sincerely,

Donald J. Boudreaux

Comments

[Robert Joyner]

one of the newest "tricks" is in the direct mail area. Some issuers are sending what look like the standard pre-approved application letters, but these are for "professional or small business" cards, which do not fall under the Credit Card Act protection.