Will New Federal Reserve Rules End Rate Jacking?

Posted by Erik on December 18th, 2008

We pointed out a couple months ago how the credit crisis could be lowering your credit score, even if you paid all your bills on time and in full. A related problem we've seen occurring all too frequently in the last month has been so-called rate jacking. The definition of rate jacking is when a credit card company increases your interest rates on 15 days' notice even though nothing in your credit history has changed.

The Federal Reserve Board today approved some dramatic rule changes that will help to minimize both of these practices. The bad news is the rule won't go into effect until July 1, 2010. So you won't be getting relief from rate jacking any time soon! It's possible Congress will pass a law before then that will make some of these changes go into effect sooner. But given Congress's inability to pass any laws reining in the credit card issuers for years, we wouldn't hold our breath – especially considering the size of donations the credit card companies make to both parties.

In the meantime, the best way to reduce your interest rate is to get a new credit card with a 0% balance transfer APR and move your balances there. Read our comparisons and reviews of the best balance transfer credit cards. If you have good credit, you have options, even in this economy.  You don't have to be a rate-jacking victim.

Here are some key points of these new rules that we've taken from the Fed's summary:

• Time to Make Payments. The final rule prohibits banks from treating a payment
  as late for any purpose unless the bank provides a reasonable amount of time for
  the consumer to make that payment. The rule provides a safe harbor for banks
  that send periodic statements at least 21 days prior to the payment due date.
• Allocation of Payments. When different annual percentage rates (APRs) apply to
  different balances on a credit card account (for example, purchases, balance
  transfers, cash advances), the final rule requires banks to allocate payments
  exceeding the minimum payment to the balance with the highest rate first or pro
  rata among all of the balances.
• Increasing Interest Rates. The final rule requires banks to disclose at account
  opening all interest rates that will apply to the account and prohibits increases in
  those rates, except in certain circumstances. First, if a rate disclosed at account
  opening expires after a specified period of time, banks may apply an increased
  rate that was also disclosed at account opening. Second, banks may increase a
  rate due to the operation of an index (in other words, the rate is a variable rate).
  Third, after the first year, banks may increase a rate for new transactions only
  after complying with the 45-day advance notice requirement in Regulation Z.
  Fourth, banks may increase a rate if the minimum payment is received more than
  30 days after the due date.
• Increase in Advance Notice for Changes in Terms. The final rule
  increases the amount of advance notice before a changed term can be
  imposed from 15 to 45 days to better allow consumers to obtain alternative
  financing or change their account usage.

Overall, we certainly applaud these rule changes and they will clearly end or severely restrict rate-jacking and other such practices. Of course, it would be much nicer for consumers if these changes went into effect more quickly. Yes, the credit card issuers need time to adjust, but in this economy consumers need relief sooner. The banks have received trillions in federal aid in the span of a couple months – you might think consumers wouldn't have to wait a year and a half for some help.

Finally, while we do think the rules are fair and a good thing overall, also keep in mind that they will make credit cards less profitable for the banks. The banks will most likely in turn offer less favorable terms and rewards programs to consumers. To what degree this will happen remains to be seen.