Populist rage over the hundreds of billions of taxpayer dollars doled out to financial institutions like American International Group (AIG) and Citigroup, has led to the passage of laws that change many long-standing practices in the credit card industry. These rule changes could cost the industry billions in fee revenue.
President Obama signed the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or the CARD Act, into law in May 2009, but many provisions have only come into effect in February 2010. These features are far-reaching and consumers need to understand how the changes impact them.
Advance Notice of Rate Increases
Your credit card issuer must now give at least 45 days advance notice before a rate increase goes into effect. This 45-day notice also applies to fees and "significant changes" to the terms of the card. Also, if you miss the deadline for a payment, the credit card company can't suddenly jack your interest rate higher until you are at least 60 days late.
The credit card company can still charge a late fee for a missed payment, but it must be "reasonable and proportional to the violation." Consumers no longer have to worry about their 0% balance suddenly jumping to 24.99% because they were one day late.
Another change in the law that will protect consumers is that if you fall 60 days behind in paying and see a rate increase, this rate increase can be reversed if you make your payments on time for the next six billing cycles. (The plastic in your wallet doesn't have to hurt your finances. Learn how to manage it responsibly in Take Control Of Your Credit Cards.)
This does not mean that your rate can't go up. Besides being 60 days late, your rate can move higher when your promotional time expires (0% for six months), or if you have a variable rate credit card where the interest rate is tied to an index like the prime rate.
Right To Cancel
If the card company does make changes to your account, you have the right to cancel the card before the changes take effect. This doesn't give you a free ride, however, as the credit card company can close your account and require you to pay your balance in five years with a higher minimum payment.
Another change going into effect in February 2010 will impact the allocation of payments method made by the credit card company. When a consumer makes a payment above the minimum, this extra payment will be used to pay down any higher rate balances first before lower rate balances.
To help consumers remember when to pay, the new law requires the payment date to fall on the same date each month, and this payment date must be at least 21 days from the mailing date of the statement. (The average American household has four cards, but does that mean more is better? Learn more in How Credit Cards Affect Your Credit Rating.)
Pay Off Information
Monthly statements mailed to customers will also include information on how long it will take to pay off your balance if only the minimum payments are being made. This should help consumers understand the long-term implications of accumulating debt.
Customers that are under 21 are the targets of intense marketing campaigns by credit card companies, and this new law provides protection for them as well. Under-21 customers will now have to prove they can make payments or get a cosigner for the card. To get credit limits raised, the cosigner must also approve the increase.
The Bottom Line
New rules on rates, fees and terms on credit cards may be a game changer for industry profitability, and may also have the effect of changing the wild spending habits of American consumers. This can only be beneficial to the U.S. in the long term.
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