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. (Read the act.)
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 on Credit Cards.com