Payday Loans Have Credit Cards Playing Catch-Up

Payday Loans or Credit Cards?

Payday loans are a fantastic option for consumers who need a small amount of cash right away and require convenient access to funding services and wish for the kind of discretion that will not impact their credit report. These are all things where the old standby people used to use for emergency expenses – credit cards – had the market cornered.

But not anymore

If you borrow from a no fax payday loan company that offers a fee of $15 to $20 per $100 borrowed, you’re paying 15 to 20 percent. This is clearly a better deal than getting a cash advance from a credit card that typically would charge 25 to 30 percent on the transaction.

Credit cards know when they’re licked. So do consumers and, by extension, the government. According to Edward L. Yingling, President and CEO of the American Bankers Association, major changes are in store for credit cards. The Federal Reserve, Office of Thrift Supervision and the National Credit Union Administration are primed to create a “new market structure” for credit cards.

Deceptive credit card practices will be curbed

Yingling outlines what changes will occur:

In seeking to address concerns expressed by policymakers and consumers, the Fed has severely restricted or prohibited card issuers from engaging in certain practices such as “universal default,” “double-cycle billing,” and raising interest rates on existing balances. The basic principles contained in many legislative proposals are reflected in these regulations.

• Universal default is when a creditor charges a consumer a higher default interest rate because they’ve been informed that the consumer previously defaulted with another lender. The uncredited cartoon shown here explains the lunacy of universal default quite well, I think (courtesy of Wikipedia).

• Interest rates charged on existing balances is yet another way that some (not all) credit cards rake customers over the coals. You certainly don’t want it, and thankfully it is going away or being made much more clear in this new round of legislation.

• Double-cycle billing is perhaps the most costly way that finance charges can be calculated on credit cards. Not only does it take into account your average daily balance for current and previous billing cycles, but also takes into account your entire previous month’s balance. Thus, if you carry a balance on your card only occasionally, you pay much more interest. Those with revolving balances aren’t hit as hard, so long as their balance doesn’t increase or decrease too much from month to month.

More from Yingling, with an interesting admission. Faxless payday loans are still a better option, eh?

While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history. With the uncertainty facing our financial system, it’s absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace.

This won’t happen all at once

Clearly it will take time to implement all of the changes. Credit card companies are certainly going to resist as much as they legally can. But even when the changes are in place, they won’t be able to match the speed, convenience and discretion payday loans offer.