How to win the credit card game? Don’t play

Using a credit card reminds me of gambling in Las Vegas.

When you walk through the casinos, people are shrieking as their slot machines pay off or they get a lucky roll at the craps table. You may see the occasional blackjack player sitting in front of a stack of chips representing winning bets. You think to yourself, if they can play and win, so can I.

But don’t be fooled. In this crowd there are a lot more losers than winners.

Similarly, when you use a credit card, the odds are never in your favor — no matter how many people around you appear to be winning.

The banks know and studies show that even those of us who think we are using credit wisely are still suckers. That’s because when you use credit, you often spend more than if you used cash. Even if you don’t pay interest on the money because you settle the bill before the next billing cycle, or if you collect a plane ticket or two as part of a reward program, you’re still spending more. That means the banks win and you lose.

So when the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration recently proposed rules to prohibit unfair practices regarding credit cards and overdraft services, I had to laugh.

Are regulators only now realizing how unfair certain credit card practices are?

Still, I have to give the agencies credit for recommending some industry changes that were greatly needed.

“I think the regulators went further than anybody expected,” said Ed Mierzwinski, the consumer program director for the U.S. Public Interest Research Group.

If the provisions, which are still up for public comment, win approval, it would go a long way to protect cardholders from rate increases and other unfair credit card practices.

The proposed rules “are intended to establish a new baseline for fairness in how credit card plans operate,” said Federal Reserve Chairman Ben Bernanke. “Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”

I urge you to weigh in on the matter. You can do so by sending your comments to any of the three regulators. There’s a 75-day window for public comment.

There are several key protections under consideration. One rule would forbid a common practice called “double-cycle billing,” which results in cardholders paying interest on debts paid off the previous month during the grace period.

The regulators are going after fees charged for subprime credit cards, which target people with poor credit histories. Credit card companies would be prohibited from charging fees that amount to more than half of the credit being offered. The proposal would also require financed security deposits and fees exceeding 25 percent of the initial credit limit to be spread over the first year.

Credit card issuers would be required to apply the payments that cardholders make to balances with different interest rates in a way that benefits customers and not their bottom lines.

Currently, many lenders will take a payment from a cardholder and apply it to the lowest interest rate debt first. For example, suppose you transferred charges from one card to another and the new card has a zero percent interest rate. If you make any new purchases, let’s say you’re charged 9 percent. In an effort to pay down the debt carrying the higher rate, you decide to send in an extra $100 above the minimum payment.

However, the card company may apply the $100 to the balance transfer with the zero percent interest rate. That payment allocation method works in the favor of the credit issuer because the cardholder continues to accrue interest on the debt at the higher rate.

“If, as the Fed proposes, payments must be allocated to the higher-rate balance first, or blended proportionally, the consumer can much more quickly reduce the higher-cost debt,” Mierzwinski said.

The most notable recommendation would prohibit lenders from increasing the interest rate on pre-existing credit card balances. The regulators would allow some exceptions, such as when a cardholder is more than 30 days late in paying his or her credit card bill.

Even with the exceptions, this proposal is a significant change and one the banks will surely fight. The American Bankers Association is particularly perturbed about the retroactive interest rate ban, arguing it would “greatly restrict the ability of card companies to charge interest rates that reflect the risks of different consumers.”

“If card companies cannot fully reflect risk, then millions of consumers with good credit histories will end up with higher rates,” the association said in a release. “The proposal would also have the likely effect of ending zero- or low-interest balance transfer options.”

Already the lenders are signaling that they’ll find a way to put the odds back in their favor.

This will always be their game.

Although regulators are proposing to eliminate some of the more unsavory practices of the industry, many cardholders — regardless of class, education or income — can only win by not playing the credit card game.

Washington Post Writers Group