Discover frets about credit card reforms…

July 11, 2008

A mysterious finance charge popped up on my last credit card statement. Even if I manage to get it waived, there’s little doubt that those evil masterminds at the issuing bank are free to smack me with any absurd charge or penalty they can dream up. In the credit card industry the customer is never right (and even if she is, she’s stuck with the mandatory arbitration clause buried somewhere in her cardholder “agreement”).

The balance of power between cardholders and banks could shift, at least a bit, if the Federal Reserve Board finalizes rule changes it proposed in May to end some of the games lenders play with credit cards. Among the creative practices the Fed is targeting are: suddenly upping the interest rate on outstanding balances, allocating payments to the portion of the balance with the lowest interest rate, and so-called “double cycle” billing (which, as far as I can understand it, slaps interest charges on money that’s already been repaid).

Apparently such lending practices are more than just fun and games for Discover Financial Services, which issues the Discover Card (and also just bought Diners Club from Citi).

The company’s second quarter 10-Q, filed yesterday, includes a new risk factor inspired by the Fed’s proposal to tighten its rules on “unfair or deceptive acts or practices” and “truth in lending.” The disclosure says that “if the amendments are adopted as proposed, the amendments would have a material adverse effect on our results of operations.”

So Discover is telling us that this Fed crackdown on “unfair practices” would cause a material hit to its results. That seems like a pretty distasteful piece of information. And if the Fed makes the changes by year-end, as some predict, the folks at Discover may have to discover new revenue sources to replace what they’re now raking in from Joe and Jane Consumer.

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