The New Credit Card Law & You
By Kelly Lange
In May of this year, President Obama signed into law what has been called a new credit card consumer’s ‘Bill of Rights’ - the law enacts major changes meant to protect consumers who rely on credit cards and make credit cards easier to understand.
At the White House signing ceremony, President Obama remarked that, “We’re putting in place common sense reforms, designed to protect consumers…. We’re not going to give people a free pass, we expect consumers to live within their means and pay what they owe, but we also expect financial institutions to act with the same sense of responsibility.”
The legislation will be phased in over 15 months beginning on the 20th of this month, so that means that different provisions of the law will take longer to go in to effect.
Some of the benefits to consumers included in the reform are:
Interest rate hikes on existing balances are cut back: If you have an existing balance on your card, credit card companies will no longer be able to increase the interest rate on that balance unless a) you are 60 days or more late on your payments, b) your card has a variable, not a fixed interest rate or c) a special promotional rate is ending (and promotional rates must now last at least 6 months). However, credit card issuers can still raise rates on new balances.
No more universal default: Credit card companies can no longer raise your interest rates because you have a bad payment record or have defaulted on another type of debt not related to the credit card (such as utility or medical bills, student loans or mortgages).
More advance notice of rate hikes: The new law requires that companies give you 45 days notice before making key changes to your card, such as raising interest rates. The current law requires only 15 days. However, this does not apply to credit limit changes.
More time to pay: Credit card companies must send out statements 21 days before your monthly payment due date. Currently, only 14 days are required. Also, payment due dates can no longer be set on weekends, holidays, before 5 p.m. or at anytime that the credit company is closed to business.
Debt with a higher interest rate is paid off first: Your credit card may have different interest rates for different types of purchases, such as cash advances, balance transfers or ATM withdrawals. When you make a partial payment on a balance on your card, most credit card companies currently put that money towards paying off the part of the balance that has the lowest interest rate. With the new law, payments must go first to paying off the higher-interest debt.
Limits on fees for going over card limits: You must opt-in to have over-limit fees. If you don’t, you simply will not be able to make transactions on your card over the credit limit.
More transparency about making minimum payments: Credit card companies must disclose exactly how long it will take you to pay off your card if you only make the minimum payment each month. They must also show you how much you must pay per month if you want to pay off your debt in 12, 24 or 36 months.
An end to double-cycle billing: Currently many credit card issuers calculate their finance charges based on not just the current month’s balance but also the previous month’s balance, meaning that if you pay off your balance in full you can still get landed with finance charges from the previous cycle. This is called ‘double-cycle billing’ and is not permitted under the new law.
Restrictions on issuing card to youth under 21: If you are aged 18 - 21 and do not have adequate income, a co-signer or have not completed a financial literacy course, you cannot be issued a card.
Lower subprime fees: If you only qualify for a subprime credit card, the fee you are charged to open the account can not be more than 25% of your credit limit.
However, it’s not all a bed of roses: critics have warned of the unintended consequences of the new law, as credit card companies move to minimize their risk and preserve profits.
After all, these companies make most of their profits off of interest and fees. Companies may reduce access to credit and try to drum up profits by reviving annual fees, charging interest on transactions immediately rather than at the end of the month, eliminate rewards programs and shift more from fixed to variable interest rates. Keep an eye out for notices from your credit card company during the next few months.
This regular financial column is presented by Capital Area Asset Builders (CAAB), www.caab.org, a nonprofit organization that helps people of all incomes to improve their financial management skills, increase their savings, and build wealth. Call us at 202-419-1440 for more information. Send feedback on this column and your ideas for future topics to saving@caab.org.
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