Credit Deals: Fed Reserve Would Ban Unfair Practices

The Federal Reserve has approved the proposal that would ban some notorious credit practices. It's also worth mentioning that the U.S. Office of Thrift Supervision as well as National Credit Union Administration also approved this proposal. Three regulators plan to finalize the rule by the end of 2008.

While consumer advocates consider this proposal as good first steps that will help get some deceptive credit practices under control and make it easier for cardholders to handle their accounts, creditors bristle they will raise credit costs and as a result make credit less available.

Fed Chairman Ben Bernanke said that the proposed rules would establish a new baseline in the way credit cards operate. The point is, today a great many consumers are relying on plastics and unfortunately it has some dramatic consequences, like heavy credit debts, filing for bankruptcy and others.

The proposal offers reforms dealing with abusive practices like universal default, double-cycle billing, and others. So, let's take a closer look at the proposed rules and learn how they would affect consumers.

The malicious tactic of universal default is the one that stings a great number of consumers who have no idea that they've done something wrong. Under universal default, a card issuer can raise your ongoing interest rate as their decision will be based on your credit performance with other issuers.

Last year lenders declared they backed this practice away. However, they managed to find another way to penalize customers, i.e. raising credit card rates when cardholder's score drops. This way, they can double or even triple consumers' interest rates.

Grace period on your credit card is also of great importance. Most probably, you've noticed that some issuers have a tendency to shorten them so that it's getting more difficult to be on time with credit card payments. Under the new proposal, creditors must give you at least a 21-day grace period.

Double-cycle billing is another complex tactic. Most cardholders just ignore it, as they don't understand the principle of credit card billing. To cut it short, the issuer figures your interest rate over the previous two months so that even if you have paid off the entire balance, you still have to pay interests the next month. Under this proposal, this practice would be prohibited.

This proposal would also prohibit a tactic in which lenders apply credit card payments to the lowest-rate balance first. Oftentimes, it results in multiple interest rates on your plastic. Let's say you've got a card with an ongoing APR of 15%, and a small promotional rate on the balance you've transferred from another card. So, when making credit payment, your issuer will apply it to the lowest-rate debt first and it generally ends up in accruing high-interest debts. Under the new proposal, you could require your lender to apply your payment to the high-rate debts first.

Financial experts share the opinion that there will be some compromise between Fed Reserve regulators and bankers. Anyway, it's a good chance to regulate the practices that led thousands to financial troubles.

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