What the new credit card law means for you?
Richard
Credit card users can expect the most dramatic changes in credit
terms, interest rates and fees in decades once a new federal credit
card law fully goes into effect.
The new normal for credit cards may be more transparency and easier-to-
understand terms, but at a higher upfront cost. Credit card issuers
and credit industry analysts say the credit card reform law will make
credit cards more costly for all users and unaccessible for low-income
families and people with bad credit. Look for the return of routine
annual fees, fewer rewards cards and the possibility that credit card
bills will be payable immediately rather than after a month-long grace
period.
The new normal
President Obama signed the Credit CARD Act of 2009 into law May 22,
2009, following passage days earlier in the Senate and the House.
What will the credit card law mean for cardholders? Millions of credit
card users will avoid retroactive interest rate increases on existing
card balances and have more time to pay their monthly bills, greater
advance notice of changes in credit card terms and the right to opt
out of significant changes in terms on their accounts. That will take
the surprise out of "gotcha" fine print and give consumers time to
shop around for better deals if they don't like the new terms. The
requirements are being phased in. The first batch took effect Aug. 20,
2009, and the majority of provisions start Feb. 22, 2010, while some
begin in August and December 2010. Once in effect, the law will also
fundamentally change the way credit card issuers market, bill and
advertise credit cards.
Here are the highlights of the credit card law:
Limited interest rate hikes: Interest rate hikes on existing balances
would be allowed only under limited conditions, such as when a
promotional rate ends, there is a variable rate or if the cardholder
makes a late payment. Interest rates on new transactions can increase
only after the first year. Significant changes in terms on accounts
cannot occur without 45 days' advance notice of the change.
Limited universal default: "Universal default," the practice of
raising interest rates on customers based on their payment records
with other unrelated credit issuers (such as utility companies and
other creditors), would end for existing credit card balances. Card
issuers would still be allowed to use universal default on future
credit card balances if they give at least 45 days' advance notice of
the change.
The right to opt out: Consumers now have the right to opt out of -- or
reject -- certain significant changes in terms on their accounts.
Opting out means cardholders agree to close their accounts and pay off
the balance under the old terms. They have at least five years to pay
the balance.
Limited credit to young adults: Credit card issuers will be banned
from issuing credit cards to anyone under 21, unless they have adult
co-signers on the accounts or can show proof they have enough income
to repay the card debt. Credit card companies must stay at least 1,000
feet from college campuses if they are offering free pizza or other
gifts to entice students to apply for credit cards.
More time to pay monthly bills: Under the credit card law, issuers
would have to give card account holders "a reasonable amount of time"
to make payments on monthly bills. That means payments would be due at
least 21 days after they are mailed or delivered. Consumers have
complained about due dates that change without notice or are moved up,
giving them less time to pay their bills and increasing the likelihood
of late fees.
Clearer due dates and times: Credit card issuers would no longer be
able to set early morning or other arbitrary deadlines for payments.
Cut-off times set before 5 p.m. on the payment due dates would be
illegal under the new credit card law. Payments due at those times or
on weekends, holidays or when the card issuer is closed for business
will not be subject to late fees.
Highest interest balances paid first: When consumers have accounts
that carry different interest rates for different types of purchases
(i.e., cash advances, regular purchases, balance transfers or ATM
withdrawals), payments in excess of the minimum amount due must go to
balances with higher interest rates first. Current industry practice
is to apply all amounts over the minimum monthly payments to the
lowest-interest balances first -- thus extending the time it takes to
pay off higher-interest rate balances.
Limits on over-limit fees: Consumers must "opt in" to over-limit fees.
Those who opt out would have their transactions rejected if they
exceed their credit limits, thus avoiding over-limit fees. Fees
charged for going over the limit must be reasonable.
No more double-cycle billing: Finance charges on outstanding credit
card balances would be computed based on purchases made in the current
cycle rather than going back to the previous billing cycle to
calculate interest charges. So-called two-cycle or double-cycle
billing hurts consumers who pay off their balances, because they are
hit with finance charges from the previous cycle even though they have
paid the bill in full.
Subprime credit cards for people with bad credit: People who get
subprime credit cards and are charged account-opening fees that eat up
their available balances would get some relief under the new credit
card law. These upfront fees cannot exceed 25 percent of the available
credit limit in the first year of the card. Instead of charging high
upfront fees, some issuers are considering high interest rates on
these high credit risk accounts.
Minimum payments: Credit card issuers must disclose to cardholders the
consequences of making only minimum payments each month, namely how
long it would take to pay off the entire balance if users only made
the minimum monthly payment. Issuers must also provide information on
how much users must pay each month if they want to pay off their
balances in 36 months, including the amount of interest.
Law doesn't cover everything
Consumers should take note: Although the reforms are the most dramatic
changes in credit card laws in decades, they do not protect card users
from everything. Issuers can still raise interest rates on future card
purchases and there is no cap on how high interest rates can go.
Business and corporate credit cards also are not covered by the
protections in the CARD Act. If credit card accounts are based on
variable APRs (as the majority now are), interest rates can increase
as the prime rate goes up. Credit card companies can also continue to
close accounts and slash credit limits abruptly, without giving
cardholders advance warning. Many banks are already finding ways
around the law and launching new fees not specifically banned by the
credit card reform law.
By Connie Prater. http://www.creditcards.com/credit-card-news/help/what-the-new-credit-card-rules-mean-6000.php