Judgment day for credit card companies has come and gone. The federal government announced that the purveyors of plastic have been too harsh on their customers. A crackdown looms in 2010, one that will have severe consequences for credit card companies and consumers alike.

History may prove that bad credit led to the unraveling of the economy in late 2008. The U.S. has been too lenient on people with heavy consumer debt, and this "bad debt" has led to the poisoning of the overall economy.

That argument may have some merit, but some of the blame ultimately lies with the credit card companies. Charging steep late fees, increasing interest rates without proper notice, and other fine-print shenanigans have made a bad thing-credit debt-even worse for consumers.

The federal government has responded by passing a series of regulations that will affect all credit card companies in 2010.

Penalties less severe


One of the biggest consumer complaints concerned the practice of reacting to late payments by raising interest rates. The new regulations allow for a penalty, but limit its severity. First, the credit card companies must give consumers more advance notice of a penalty rate increase. Gone is the 15-day notice, to be replaced by a 45-day period. Second, if a credit card company advertises a fixed rate, they won't be able to increase that rate-no matter what the reason.

Stuck on zero


One common maneuver used by credit card companies is to entice consumers to transfer their bad credit into an account that charges zero percent interest on balance transfers. People with bad debt often fall for this pitch, but are later shocked to discover that the companies will issue a finance charge on any unpaid balance after the introductory period has expired. The charge is generally an interest payment for the previous six months. Under the new regulations, companies can't charge interest for the six months that have lapsed, but can charge interest on that balance moving forward.

Specifying where the money goes


Another tactic of credit card companies is to apply your payments to the portion of credit debt that's carrying the lowest interest rate. If you transferred a balance onto your credit card at a 6 percent interest rate, for example, and then were charged 12 percent for subsequent purchases, the credit card would apply your payments to the balance with the lower interest rate. They'd continue to collect finance charges on the balance with the 12 percent rate.

New regulations now specify that the companies must either allocate the payments to the balance with the higher rate, or spread it evenly throughout the entire consumer debt.

The new federal regulations will include sweeping changes for many credit card companies. It may also adversely impact consumers. Without being able to use penalties to recoup losses, credit card companies will now be more selective about whom they extend credit to. The end result: An industry with increased integrity, but decreased liquidity.

Published on January 23, 2009