NEW CREDIT CARD LAW
|
How the New Credit Card Law Affects You The year 2010 marks a new decade, as well as a new era for credit cards in the United States. On February 22, the Credit Card Accountability Responsibility and Disclosure (CARD) Act will go into effect. This law will permanently change what credit card companies can and cannot get away with. Let's take a look at these changes and how they will be affecting you: Payments go towards the higher rate balances In the past, credit card payments would only be applied to balances with the lower rates first (such as 0% balance transfers and other promotional offers). For the cardholder, this would trap them in a perpetual debt cycle; their balances with APRs of 15 to 20% would never get paid off, since the payments would be going towards their balance transfers instead. "This is perhaps the most important change. In times like these, it's really going to help consumers." says Sheila Gibson, assistant editor at CreditCardForum.com, which is a portal for credit card reviews. "There are tons of members on our credit card forum rejoicing over this change." There will be a minimum grace period Issuers will be required to have a minimum grace period of at least 21 days after each billing cycle closes. That means consumers will have 3 full weeks to pay their balance off, before any interest is accrued. The end of double‑cycle billing This was a questionable practice where interest was calculated based on the balance over two billing cycles. That means if there was a balance one month, but not the other, it's possible the cardholder may still have to pay interest for the second month. The biggest bank doing this practice was probably Discover. They would apply this practice to three of their most popular cards; the Discover More Card, Discover Open Road, and Discover Motiva. Fortunately, these cards will no longer be able to levy double cycle billing on their customers. It will be harder for banks to raise your rate In the past, credit card companies had the ability to raise a cardholders interest rate whenever they want, for whatever reason they want. Now, there will be a number of tighter restrictions in place which will make it much more difficult to raise rates. For example, rate hikes during the first year a card is opened will be extremely hard to pull off and banks will be required to give you a notice of at least 45 days before your APR is changed. This was a big problem for consumers when they were looking at credit card reviews, because a bank would not always honor the offer after it issued the card. In addition to the above provisions, there are a number of other important changes which will be taking effect. 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. 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. 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. The New 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. 8 MAJOR BENEFITS OF NEW CREDIT CARD LAW * A rate increase can't be applied to existing balances unless cardholder is delinquent. * Cardholders must be notified of a rate increase 45 days in advance, but there is no cap on rates. * Those under 21 can't apply for a credit card unless they have co‑signer, income or pass course. On May 22, President Barack Obama signed the Credit Card Accountability, Responsibility and Disclosure, or Credit CARD, Act of 2009 into law. The legislation will improve consumer disclosures and end some egregious practices in the credit card industry but stops short of capping interest rates and fees. Most of the provisions go into effect Feb. 22, 2010, unless otherwise stated. Here's an overview of the major changes the law will enact. New credit card rules 1. Retroactive rate increases. 2. More advance notice of rate hikes. 3. Fee restrictions. 4. Restricts marketing and issuance to students. 5. Ends double‑cycle billing. 6. Fairer payment allocation. 7. More time to pay. 8. Gift card protections. 1. Retroactive rate increases Issuers can't raise rates on an existing balance unless a promotional rate expired, the variable indexed rate increased or you paid late by 60 days or more. No longer will they be able to punish borrowers for late payments on unrelated accounts under the practice of universal default or due to "anytime, any reason" clauses. If the cardholder does trigger the default rate because of a 60‑day delinquency, the bank must restore the lower rate once the cardholder demonstrates six months of consecutive on‑time payments. This provision takes effect in August 2009. In general, rates can't be raised in the first year after issuance, and promotional rates must last at least six months. Exceptions include expiration of a promotional rate, termination or completion of a workout plan, a change in the index rate or a 60‑day delinquency. Caveat: Issuers can raise rates at any time for any reason on new balances with 45 days' advance notice. Cardholders will still need to read correspondence from their creditors. 2. More advance notice of rate hikes Consumers get 45 days' notice before key contract changes take effect, including rate increases. Under the current Truth in Lending Act, cardholders only receive a 15‑day heads up. This change takes effect Aug. 20, 2009. Caveat: This provision doesn't apply to credit limit changes. If your issuer slashes your limit, notification isn't necessary unless the reduction would trigger a penalty, such as an overlimit fee. The new rules also don't cap interest rates. The increased rate can still be triple your existing APR. 3. Fee restrictions Cardholders will not face overlimit fees unless they elect to allow the creditor to approve overlimit transactions. Issuers can't charge more than one overlimit fee per billing cycle. In general, banks can't charge consumers a fee to pay their credit card debt, a cost some cardholders encounter for payments made by telephone or Internet. They can impose a fee to expedite a payment. Payments received by the due date ‑‑ or the next business day, if the bank doesn't accept mailed payments on the due date ‑‑ won't trigger a late fee. If the cardholder pays at a local branch, the payment must be credited the same day. The new law limits fees on "fee‑harvester" subprime cards as well. In the first year after issuance, nonpenalty fees cannot take up more than 25 percent of the initial credit limit. 4. Restricts card issuance to students Consumers under age 21 who can't prove an independent means of income or provide the signature of a co‑signer aged 21 or older won't get approved for credit cards. The provision protects young people who lack the means or the knowledge to handle credit cards from miring themselves into debt, but could backfire by pushing students to payday lenders and pawnshops, says Greg McBride, senior financial analyst at Bankrate.com. According to a recent Sallie Mae study, college students carried an average balance of $3,173 on their credit cards last year, a record high since the first analysis in 1998. A whopping 82 percent revolved a balance each month. 5. Ends double‑cycle billing The new law bans double‑cycle billing, the practice of basing finance charges on the current and previous balance. Under this method, the issuer could charge interest on debt already paid off the previous month. 6. Fairer payment allocation A close look at your card agreement will likely reveal a clause that explains that payments will be applied to lower‑rate balances first. Not so anymore. The Credit CARD Act requires above‑the‑minimum payments to be applied first to the credit card balance with the highest interest rate. 7. More time to pay Card companies must send statements 21 days before a payment is due. Current law requires a mere 14 days' notice. This provision goes into effect Aug. 20, 2009. 8. Gift card protections The legislation includes protections for gift cardholders. The new law prohibits gift cards from expiring for at least five years. Issuer cannot assess inactivity fees unless the card has gone unused for 12 months. |