The New Credit Rules

Here is the summary of the new credit regulations from the Fed.

The main changes include: interest rates cannot be changed within the first year (with a couple of exceptions), new rates can only apply to future purchases, an end to two-cycle billing, and the annual fee is capped at 25% of the initial limit. Consumers must also have the option of over limit "protection." Another change coming in August is that consumers will have to opt-in to overdraft "protection" on their bank accounts.

One of the more blatant policies banks have been using was to enforce new interest rates to past purchases. This would be a blatant breach in any other contract. I don't expect the lender of my car loan change my interest rate in the middle of my four year repayment schedule. Banks cannot alter a fixed mortgage interest rate in the middle of the term either. Yet, credit cards were subject to this insane practice.

Most of the other regulations seem like common sense and are aimed at making sure consumers have the necessary information. In reality, I don't think this is going to be as big of a hit to banks as many are predicting. American's have gotten used to the idea of spending more money than have, regardless of the interest rate or other fees attached. Most people are going to continue to not read their credit card policies anyway.

One of the consequences of this is that banks are going to have to resort to a more standard business model: price discrimination, meaning that they are going to charge high fess to people who they believe can afford to pay more. This is standard practice in many industries. The interesting part is that before these new regulations,  banks had found a way to reverse-discriminate. By not providing or hiding information, and making retro-active rate changes, banks found a way to charge the highest price to those who could least afford to pay it.

I pay all my bills online. I review my interest charges and make sure there have been no unauthorized purchases, but I rarely review my paper bill unless there is a discrepancy. Banks push online banking and email statements almost as hard as they push overdraft protection. I wonder if banks will decide not to make the new information available in an easy to find manner on their websites. That could be a big loop hole.