So many in the world of finance are talking about the Credit CARD Act – the Credit Card Accountability Responsibility and Disclosure Act of 2009 to be exact. And if you use or carry a balance on a credit card – any credit card – you should be too. The purpose of the Act is “to amend the Truth in Lending Act to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes” [1]. Simply put, the Act gives new regulation to credit card companies and more protection to the consumer.
Here are the concerns the Credit CARD Act set out to address and an explanation of the regulation changes that just took effect last month:
You have more time to make your payments
As of August 2009, your statement must be mailed or delivered (think e-statements) 21 days prior to the payment due date. This is a 7 day improvement over the previous rule. Additionally, your payments will be due the same day each month by 5pm. If your due date falls on a day that payments are not processed, you will have until the next business day by 5pm to make your payment.
You have balances with two different interest rates but your payment is only applied to the lower interest rate balance
Now payments in excess of your minimum payment must be applied to the higher rate balances first. That is unless you have a deferred interest plan (i.e. 0% for a few months) and choose to have your payments in excess of the minimum payment applied to the deferred interest balance first.
More protection for borrowers under 21
Consumers under the age of 21 will need to demonstrate ability to make payments or will need a cosigner in order to open a credit card account. Furthermore, cosigners will need to agree in writing to any requested increase in the credit limit.
Credit card companies can no longer offer sign up gifts on or near college campuses.
Seemingly unexplained rate and fee increases
Under the Credit CARD Act, your rate cannot be increased for the first 12 months that your account is open except if (1) your rate is variable and tied to an index that increases (2) your introductory rate expires (3) you are more than 60 days late making your payments or (4) you have a workout agreement and you do not make payments as agreed. Any introductory or teaser rate must be in effect for at least 6 months.
Increased interest rates can only be imposed on new balances and any increase in rates, fees or other significant terms must be communicated to you 45 days before the change takes effect. You have the right to opt-out of those changes but opting-out may result in your account being closed or an increase in required minimum payment within certain limitations. If that change is related to a variable rate tied to an index, an introductory rate that expires or because you did not make payments per your workout agreement, a 45 day notice is not required.
There are now also caps on card fees such as annual or application fees of 25% of your initial credit limit.
Over-the-Limit Fees
You can now let the credit card company know whether or not you want it to approve transactions that will take you over your limit. If you opt-in and exceed your limit, you will be charged a fee. If you opt-out and exceed your limit the transaction may be declined. If the transaction is not declined and you opted out, you will not be charged a fee.
The minimum payment is not designed to get you out of debt
A new section on the credit card statement now tells you (1) how long it will take you to pay off your balance if you only make the minimum payment (2) how much you would need to pay monthly in order to pay off the balance in 3 years and (3) the total cost of both options. A phone number to Consumer Credit Counseling Agency is also now provided on your statement.
There is no more Double Cycle Billing which applies interest charges to two full cycles of your credit card balance resulting in higher finance charges and slower payoff.
Universal Default
Lenders have, in the past, been able to change the current terms of an account to default terms when informed that the consumer has defaulted with another lender, even though the consumer has not defaulted with the first lender. This practice is called Universal Default.
You can imagine that limits on increasing interest rates and restrictions on fees can cost the credit card companies a lot of money. We should expect that they will be creative in how they make up for those losses. Get ready to say “Hello” to new types of fees and “Goodbye” to things like rewards programs and single digit interest rates.
The bottom line is this: As a consumer you need to protect yourself. If you know how the game works you can do just that!
Sources: [1] www.govtrack.us, www.federalreserve.gov, Wikipedia, office.microsoft.com
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