Overcharged and Over a Barrel

By Michelle Singletary
Thursday, December 18, 2008

Imagine, if you will, that the interest rate on your auto loan could escalate greatly if you were late on another bill. If that were so, I'm sure many more people would pay cash for a hoopty rather than take on a loan with such an outrageous term.

Would you sign a contract with a clause giving the lender the right to charge you interest on an amount you've already paid off? I bet you would slap the table in outrage and refuse to sign on the bottom line.

And yet every time you sign up for a credit card, that's what you do: You agree that you are willing to be taken advantage of in exchange for the opportunity to buy now and pay later.

But if the Federal Reserve doesn't punk out, it will change some of the table-slapping industry practices governing the way credit card accounts are marketed and managed.

Among proposed regulatory changes expected to be adopted today under the Federal Trade Commission Act, the Truth in Savings Act and the Truth in Lending Act, banks would be banned from increasing the rate on a pre-existing credit card balance except under limited circumstances.

Credit card issuers would be prohibited from taking any money that customers pay over their minimum monthly payment and applying those funds in a way that maximizes what the company gets in interest charges. That rule change relates to people who have one credit card with balances that carry different interest rates. Currently, there's an industry practice that if a customer makes a payment above the minimum, those funds are applied to the balance with the lowest interest rate first. That allows the balance carrying the higher rate to pile up interest charges.

The Federal Reserve may also decide to prohibit banks from imposing interest charges using the "two-cycle" method, where interest is calculated on the balance you carry over the previous two months.

Oh, and get this: If the Fed goes through with the proposed rule changes, banks would be required to provide consumers a reasonable amount of time to make payments.

Take a moment to reflect on the industry practices that now are standard. If I had laid them out as part of a contract that wasn't tied to a credit card, many of you would tighten your brow and probably curse somebody out.

Consumer advocates have been fighting for changes in the credit card industry for years, but consumers haven't made it easy. It's been hard for advocates to make the case for consumer protection when so many people have been willing to accept outrageous terms because it allowed them to get more credit that allowed them to buy more stuff.

So why do we accept as routine these business practices that consumer advocates have long decried as unfair and deceptive?

It's because we are greedy. That's how one of my friends sees it. He's sworn off credit cards.

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