Credit cards are deceptive, and we accept it

WASHINGTON -- Imagine that the interest rate on your auto loan could escalate greatly if you were late on another bill.

How about this? Would you sign a contract with a clause giving the lender the right to charge you interest on an amount you've already paid off?

I bet in each case you would slap the table in outrage and refuse to sign on the bottom line.

And yet every time you sign up for a credit card, that's what you do: You agree that you are willing to be taken advantage of in exchange for the opportunity to buy now and pay later.

Some of the table-slapping industry practices governing the way credit card accounts are marketed and managed are finally going to change.

On Thursday, the Federal Reserve, the Treasury Department's Office of Thrift Supervision and the National Credit Union Administration all approved new rules that ban credit card companies from increasing the rate on a pre-existing credit card balance except under limited circumstances.

Starting in July 2010, credit card issuers are prohibited from taking any money that customers pay over their minimum monthly payment and applying those funds in a way that maximizes what the company receives in interest charges. That rule change relates to people who have one credit card with balances that carry different interest rates. Currently, there's an industry practice that if a customer makes a payment above the minimum, those funds are applied to the balance with the lowest interest rate first. That allows the balance carrying the higher rate to pile up interest charges.

The new rules also prohibit banks from imposing interest charges using the "two-cycle" method, where interest is calculated on the balance you carry over the previous two months.

Oh, and get this: Banks will be required to provide consumers a reasonable amount of time to make payments.

Take a moment to reflect on the industry practices that now are standard. If I had laid them out as part of a contract that wasn't tied to a credit card, many of you would tighten your brow and probably curse somebody out.

Consumer advocates have been fighting for changes in the credit card industry for years, but we consumers haven't made it easy. It's been hard for advocates to make the case for consumer protection in this area when so many people have been willing to accept outrageous terms because it allowed them to get more credit that allowed them to buy more stuff.

So why have we accepted as routine these business practices that consumer advocates have long decried as unfair and deceptive?

It's because we are greedy. That's how one of my friends sees it. He has sworn off credit cards.

"I'm mad at credit card companies for making the rules, but I'm also mad at consumers for accepting them," he said recently when we were discussing the proposed rule changes. "There's no way those terms were fair to anybody -- no matter how affluent. Consumers should have refused to accept them. If they had, the marketplace would have prevailed and the credit card companies would have withdrawn them."

He's right, you know. The Fed wouldn't have to be imposing these new rules if we weren't such chumps.

My friend hasn't used a credit card in years. He doesn't use credit because he fundamentally does not like the way the companies do business. I admire him for his integrity in this respect. How many times have you sworn at your credit card issuer for some standard practice and yet still pulled out that plastic to pay for something?

Credit card issuers argue that the way they do business reflects the risks of different consumers. Now that we're in a recession, many people who had considered themselves model customers are seeing how unfair the credit game is. They are seeing their credit limits being slashed or interest rates pushed.

Once the rules go into effect -- maybe even before -- it's likely that consumers with good credit histories will end up with higher rates. I don't doubt what the American Bankers Association says when it argues that the rule changes will all but end zero- or low-interest balance transfer offers.

Ah, but rest assured that the lenders will find a way to continue granting credit and charging whatever the market will bear. That's because this particular market has shown it will bear just about anything for the privilege of paying with plastic.