Credit Card Industry Urged To Review Practices
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Credit Card Industry Under Pressure to Reform
Overview
Recently, you might have noticed changes in your credit card offers. For example, Chase Card Services eliminated the two-cycle billing practice, which calculated interest on balances over two billing cycles instead of one. This change can reduce finance charges for those who carry a balance. This shift is part of the industry's response to increasing pressure from consumer groups and lawmakers to end what are seen as predatory practices.
Key Developments
In March, Citigroup responded by removing controversial practices, such as increasing interest rates or fees at any time and the "universal default" policy, where a missed payment to any creditor could raise your credit card rates.
In June, both Bank of America and Chase introduced programs to help customers understand credit card terms better, which some see as proactive measures against potential government regulation.
Legislative and Regulatory Efforts
Congress has conducted hearings in response to numerous complaints about credit card practices, though new laws may not pass soon. Some lawmakers believe new regulation isn't the solution. However, the Federal Reserve is proposing significant changes, including a rule requiring 45 days notice for interest rate hikes, up from the current 15 days.
Problematic Practices
A report highlights several concerning practices among credit card issuers:
1. Late Payment Penalties: Imposed even if payment is only slightly late.
2. Arbitrary Interest Rate Hikes: Rates can be raised for any reason.
3. Payment Allocation: Payments are applied to balances with the lowest APR first, allowing higher APR balances to accrue more interest.
4. Trailing Interest: Interest charged between the last statement's cutoff and payment posting.
5. Balance Transfer Fees: Lack of a fee cap can lead to high charges.
Consumer groups argue these practices exploit users, while the industry claims they guide responsible credit use.
What It Means for You
If you have concerns with your credit card issuer, now may be a good time to address them. Companies might be more open to negotiating terms, such as reducing interest rates, especially if you have a good credit score.
Understanding Industry Dynamics
Credit card issuers use measures like "universal default" to mitigate risks associated with lending. Advances in credit scoring enable issuers to differentiate risk levels, similar to mortgage lending practices.
Credit cards operate as revolving credit, meaning each payment cycle refreshes your borrowing potential. This setup means any change in your financial behavior can impact your credit card terms.
Conclusion
These industry practices encourage cardholders to manage credit responsibly. Being aware of your credit score and history is essential. Successfully managing this number can lead to significant benefits, reflecting your overall creditworthiness.
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