Fed Cracks Down On Credit Card Industry
CHERYL CORLEY, host:
I'm Cheryl Corley, in for Michel Martin, and you are listening to Tell Me More from NPR News. Coming up, the moms talk about getting toys for their kids that look like them, and why it matters. But first, in the continued fallout from the economic crisis, the Federal Reserve approved new rules for the credit-card industry last week. Some of those changes include protecting consumers from increased interest rates on existing account balances, and credit-card issuers can only raise interest on new credit-card accounts and future purchases, rather than existing balances. It's the biggest credit-card reform in decades, and I'm joined by Alvin Hall, Tell Me More finance expert, to tell us what it means for us. And we're also joined by Scott Bilker, who is the founder of DebtSmart.com. Welcome to you both.
Mr. SCOTT BILKER (Founder, DebtSmart.com): Thanks for having me, Cheryl.
ALVIN HALL: Very glad to be here, Cheryl.
CORLEY: Alvin, let me start with you. I was wondering whether or not you were surprised with these reforms that had come about in the credit-card industry and if you thought it had to happen.
HALL: I was not surprised. I did not think it went far enough. These changes had to come about because, basically, the government had given credit-card issuers a free hand, especially when they allowed them to enact the universal default clause, which meant that if you defaulted on a credit-card payment, a car payment or a house payment, and it changed your credit rating, automatically the company could raise your interest rate on any credit card that you have. That was just totally exploitative, and all of the fees were wrong. Still, it's a first step in a long line. The thing that I think they've done that's really important is to stop credit-card companies from applying your money to the balance with the lowest interest rate. So, when you make the minimum payment, they must now apply it to the outstanding debt with the highest interest rate. That to me is an important change.
CORLEY: So, Scott, why don't you tell me what other changes credit-card companies have made?
Mr. BILKER: One of the best changes I think is that there's going to be a safe harbor of 21 days that the credit cards must give you to make your payment. I mean, I think a lot of people know that their bills have been coming closer and closer to the due date when they arrive in the mail, and it makes it more difficult for people to pay on time, and thus everyone's getting charged, you know, late fees. So, with 21 days to pay, it's going to be certainly more fair.
As far as allocation of payments, I mean, it's true; right now they're going to - if you have a split balance - some at a high rate, some at a low rate - they have right in their terms that they can apply your payment to the highest interest rate first. And they say, you know, whatever is most favorable for them; that's how bracing they are in their terms. But this ruling doesn't even go far enough because it's true: Now, they have to apply it to the highest rate, but only after the minimum payment.
CORLEY: Hm. Well, OK. So, you say that these changes don't go far enough, but they are a first step. Why was this first step taken?
HALL: Because so many people complained. When the Federal Reserve put this up for comment, they got something around 65,000 comments. I think all of us, you know, people who've watched their interest rates go up to 30 percent, who've been unable to make future payments on outstanding credit-card debt, the cry from the public was getting stronger and stronger, and the government could no longer ignore it.
CORLEY: So, let me ask you this. These rules really don't take effect until July 2010, as I understand it.
HALL: Shocking, shocking.
(Soundbite of laughter)
HALL: It is shocking. Britain has enacted similar rules that go even further, and their rules take effect on January 1st. Why is it in America that the government, still, is prey to the credit-card lobby? I do not understand that. The government should say, we gave you this money to help bail out the banks; you have to adhere to this deadline on January 1st, full stop.
Mr. BILKER: Well, you know, that would be great. But you know, the banks are smart. Even with all this rules enacted, I really have a feeling they're going wiggle out of these things.
CORLEY: So, wait, wait. You guys are saying that - even though you're saying that this is a good first step, that you don't even think that this first step is going to last?
HALL: I don't.
(Soundbite of laughter)
Mr. BILKER: I don't think so either. I mean, they're going to invent new fees. I'll give you an example of one that I'm getting a lot of email about right now. People, particularly with Chase, have been getting notices that if they've had the revolving balances for over two years, their minimum payments are going up - that's kind of a good thing because they'll pay it off quicker - but now they're going to get charged a $10-a-month fee for preparing their balances.
CORLEY: Well, if you don't have a credit card and, let's say, that these changes are supposed to be happening sometime soon, if the banks don't do some end-run around them, is this the best time to go out and get a credit card, or should you hold off? Alvin, why don't you begin?
HALL: That's a very good question. That's a very good question. Would I get a credit card now, if I didn't have one? I probably wouldn't because the rules don't take effect soon enough. Unless you can afford to pay off that balance at the end of every month, and also watch the amount that you charge on the credit card, because the more you approach your limit, then the more bad effect that'll have on your credit rating. Only if I knew I could pay a credit card off every month would I get one now.
CORLEY: Scott, what do you think?
Mr. BILKER: Yeah. I agree. I mean, the best way to go about using credit is to be able to pay it off every month. However, if you have debt right now and it's at a high rate, the only way you could protect yourself is to get a new credit card at a lower rate. And the only way we can all protect ourselves as consumers is to have some credit options so we can make these banks fight with each other. The strongest power you have is when you call one bank and say, listen, either you're going to lower your rate, you're going to reduce these fees, or I am gone. I will transfer my balance and I will never use you again. If you don't have other credit cards to do that with, you're going to be trapped with the one card that's taking advantage of you.
CORLEY: Well, that's the - only if you have good credit, right? I mean, if you don't have very good credit, it's going to be more difficult to get a credit card, wouldn't it?
HALL: Yes, it is. That's unfortunate. But still, today, I tell everybody, it pays to shop around. Don't you agree, Scott?
Mr. BILKER: I certainly agree. You always have to shop around because, you know, there's so much fine print to read and sometimes you don't even know until a thing arrives in the mail, the statement. So, you know, they're always going to send you the letter with the bold print, saying how great the card is. And then the fine print takes away what the bold print said. You know, they might promise you a no-fee, high-limit card. And then you get it; it's a high-rate, high-annual-fee card with a low limit. And they can deceive anyone. I've been tricked, too, and I read the stuff very carefully.
CORLEY: Hm. Well, if you're just joining us, we're talking to Scott Bilker about credit cards and how best to manage them, along with Alvin Hall, here on Tell Me More. Before we go a little deeper into the conversation, Scott, it's important to note that you actually have many credit cards, as I understand.
Mr. BILKER: I certainly do.
CORLEY: How many do you actually have? How many?
Mr. BILKER: Well, about 80 credit cards between my wife and I.
CORLEY: Eighty credit cards. Wow.
Mr. BILKER: Right now.
Mr. BILKER: Yeah, I don't use them all, or we'd be doing a piece on bankruptcy right now.
(Soundbite of laughter)
CORLEY: What benefit, really, is there to having so many cards?
Mr. BILKER: OK. The benefit for me has been that no one credit-card bank has been able to take advantage of me for over a decade. My rates have been zero because I always have credit-card options. If any of them try to charge me any kind of high interest rate, I can go to a different card very easily.
CORLEY: Alvin, we're all getting ready to - or in the holiday week.
CORLEY: So, what should the message be? You know, a lot of people will use their credit cards, especially as they do shopping for the holidays. Should they be spending on the cards, or taking account of their existing credit and pay it down, or what exactly should people be doing?
HALL: I would, if I had an outstanding balance, I would work hard on paying that down and use cash to buy gifts. If I could get a zero-percent credit-card offer and I could transfer a balance over, I would transfer the balance over and then work hard for that grace period to pay off that balance. And I think Scott has done a great thing by talking about the fact that he's paid no interest. And if you can get one of those credit cards with zero percent, transfer the balance off. But be diligent with your credit. You have to monitor it closely these days because, of course, all aspects of our lives can be affected by a bad credit rating. So, charge no more than you can afford to pay off each month. If you're a person who is absentminded, then go online to the Web site of your credit-card company and check your balance when you think you may be getting to close to the limit.
CORLEY: Mm-hmm. Scott, on your Web site, DebtSmart.com, you actually give tips on how to make credit cards work for you, and you've talk a little bit about, you know, getting cards with lower interest rates. How should consumers really do this? Especially, you know, we're really in tight economic times right now.
Mr. BILKER: I think that Alvin has really hit the nail on the head with a lot of those tips, you know? Or you always want to transfer your balance to, you know, the lowest rates, especially if you have a good zero-percent offer. But I also believe that it is best to use your credit cards because, you know, you get rewards for them. I haven't paid anything to go to a movie in three years because I have a rewards card for the local theater here. So, and that's a family of five, three years, movies all the time. Plus I've gotten, like, at least $600 back - yes, from a convenience-store rewards card. So, using your cards is good. The key is, it's really not the credit that will get you; it's the spending. As long as you stick to the number that you know you can afford, it doesn't matter how you pay for it. And you pay it off, like Alvin said, as soon as the bill arrives.
Mr. HALL: And I agree with Scott, that you should look at credit cards that have benefits that suit your lifestyle, right? He drives. I don't drive a car. So, having a credit card with gas back wouldn't do me any good. But I love air miles. So, I use mine to upgrade myself from a coach fare to a business-class fare when I fly around. So, get the benefits that suit your particular lifestyle.
CORLEY: And what do you do if, you know, you have set that limit, but they end up overspending, what's the best way for them to try to get that situation under control?
Mr. BILKER: What they have to do is, when the bills arrive they have to get organized. There's really three things you have to do to get out of debt. One, you have to become organized financially, because if you don't know what you owe, it's going to be impossible to make a plan. Secondly, you have to get all your rates low. You have to make sure that even if you did go over, that you contact the banks and negotiate a lower rate. It might be a difficult time now with credit, but banks will still listen to you because they know they need customers to survive. And the third thing is you need more money, because - I know it's easier said than done...
Mr. BILKER: But even if you get all your rates down to zero, you have to pay it back. So, there has to be a focus on money, and the good news is when you start to focus on these things, you're going to see that you have options, and they're going to become clearer, and you'll just take advantage of them.
CORLEY: Alvin, anything to add?
Mr. HALL: On my show that I do in Britain, "Your Money or Your Life," we had a lady on the show that had close to $85,000 worth of credit-card debt, and she did exactly what Scott said. She focused on the debt, got herself organized. When she would get a lump sum in, she would call up the credit-card companies. Let's say, she owed them $7,000. She'd say, I have $5500 here; will you take it and erase the debt? And surprisingly, a lot of them did. So, if you are focused and organized - and just be disciplined with money; any money that comes in, extra money, you have to allocate it toward the debt - you will be able to get out of credit-card debt.
CORLEY: Alvin Hall is our regular contributor on issues of personal finance. He joined us from our bureau in New York. And Scott Bilker is founder of DebtSmart.com. He joined us from Atlantic City. Thank you to you both so much.
Mr. BILKER: My pleasure, thanks for having me.
Mr. HALL: You're welcome.
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