Sunday, May 24, 2009

Credit Card Reform and the Balance Transfer Trap

All of the mainstream media coverage of the Credit Card Act of 2009 that I saw failed to mention a very important provision relating to promotional rates, especially those applicable to balance transfers.

Currently, banks credit payments against lowest interest balances first. So, for example, if you transfer a balance of $10,000 from one card to another, at a promotional rate of 1.99% or some such, and then buy something for $100 using the same credit card, you cannot pay off the $100 purchase until you pay off the $10,000 transfer. If you pay the credit card company $100, that amount is subtracted from your balance transfer account, and the $100 “purchase” remains outstanding, bearing interest at the “purchase” interest rate. The more you buy, the more your “purchases” balance rises and the smaller your “balance transfer” balance becomes.

It is hard to imagine a decent motive for this practice. It’s a trap for the unwary, and, because every bank I know of does it, I think it’s a national embarrassment, sad and powerful evidence that, left to its own devices, American business will screw American customers. (I’d be interested to read a defense of the banks’ ethics in this matter, if anyone can think of one.)

Anyway, the CCA has abolished the practice. When the law becomes effective next February, banks will be allowed to apply your minimum monthly payment against low-interest balances, but any payments over the minimum must be applied to balances in decreasing interest rate order. That’s how the thing should always have worked, and it’s a shame it took an act of Congress for our bankers to get the message. (Actually, they probably haven’t got the message, but they will at least have to do what the law says they have to do.)

Promotional rates in general, and balance transfer offers in particular, may well disappear when the law become effective. If so, that will probably be proof that the scheme was corrupt – that the banks only use for promotional rates was to separate fools from their money. That remains to be seen. For now, however, kudos to Congress for eliminating this small abomination.

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