Insights & Advice


From Clunkers to Credit Cards

Recently, I wrote columns on both the ‘Cash for Clunkers’ program and the Credit Card Relief Act. I thought I should give my readers an update on these government initiatives given recent developments.

As of today, August 20, those of us who are struggling with credit card debt will get some relief (see “Credit Card Companies: Raising Rates Again”). Credit card issuers are now required to give all of us 45 days advance notice before making any big changes to our credit card contracts and they are going to be required to mail bills 21 days before the due date. In the past, credit card companies were required to give 30 days notice before contract changes and only mail bills 14 days prior to the due date.

That’s going to make it easier for consumers like me to pay monthly installments on time and avoid penalties for being late. I normally pay off my credit card balance every month on the same weekend but there have been times when I have forgotten and by the time the next weekend rolls around my credit card bill is late by a day or two. I hate when that happens. Now, with another week to pay, I feel the pressure is off.
As for the contract change, there is a downside to the new rule. While consumers will have the right to reject an interest rate increase and cancel their cards, the cardholder will then be required to pay off their balance at the prevailing interest rate within five years. This could result in a much higher minimum payment since the period you have to pay off your debt would be compressed. However, if the balance is so large that it would mean the minimum payment would double then it’s up to the credit card company to either extend the time period, adjust the interest rate or both.

As the smoke clears on what is being billed as “the most successful, worst-run government program ever,” “the cash for clunkers” program looks ready to sunset over the next few days. The clunker program offered rebates of up to $4,500 to auto owners who trade in their old vehicles for new, more efficient models. You need to show proof that 1) you have owned, registered and insured your auto continuously for one year and that 2) that the vehicle when new was rated at 18 miles per gallon in combined city/highway driving.

As of yesterday, 435,102 transactions were made under the program with dealers nationwide requesting $1.8 billion in reimbursements. At the same time, the Greater New York Automobile Dealers Association said about half of their 425 members have left the program because they cannot afford to offer more rebates. Dealers everywhere are also worried that the $3 billion program will run out of money before they are reimbursed for discounts given to car buyers on clunker transactions.

The problem, according to the dealers I talked to, is that it is next to impossible to project the “burn rate” of available funds remaining in the program. And the rules make it clear that the government does not have to pay dealers who submit claims for reimbursement after the clunkers program runs out of money. But I suspect that the real issue centers on the success of the program. There are simply very few autos remaining on dealership lots to sell and none of the most popular fuel-efficient models.

However, take heart, dear reader, another wave of subsidies is coming; this time in the home appliance market. So get ready for up to a $200 rebate on your old energy- inefficient refrigerators, washing machines, dish washers, furnaces and air-conditioning systems. The program, approved by Congress earlier this year, will be capped at $300 million so you better move fast!

Posted in Macroeconomics, The Retired Advisor