Credit Card Debt

The Credit Card Accountability, Responsibility, and Disclosure Act (or Credit Card Act) of 2009 include the most sweeping changes in how credit cards are marketed, advertised, and managed.  So, what will the credit card law mean for cardholders?   

The new law may mean 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 inaccessible for low-income families and people with bad credit.  Also, consumers might want to keep an eye out for the return of routine annual fees, fewer reward cards, and the possibility that credit card bills will be payable immediately rather than after a month-long grace period. 


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The new requirements are being phased in and the first batch took effect Aug. 20, 2009.  A majority of provisions start February 22nd, 2010, while some being in August and December 2010. But in order for you to really take advantage of the new rules, you need to know what they are and keep a close eye on your bill.

Here are the highlights of the credit card law:

  • Limited interest rate hikes:  As of Feb. 22, credit card companies cannot raise your interest rate on your existing balance unless you fall 60 days behind. Don't let that happend because if it does, they can raise your rates astronomically. 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:  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 if they give at least 45 days’ advance notice of the change.
  • Right to opt out:  Consumers now have the right to opt out of or reject certain significant changes in the 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 an adult co-signer on the account 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 5p.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 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:  Credit card companies will offer "over the limit" protection that allows you to charge more than your credit limit. They key here is that you have to "opt in" but experts warn you to be very careful. "What you'll find if you read the fine print, if you do opt in to the over limit protection that the charges that they can levy against you can be astronomical," said Susan Howe with Pennsylvania Insititute of Certified Public Accountants. 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 the 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% 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 payment:  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 law doesn’t cover everything.  Consumers should take note that the new credit card reform law does not protect them from everything.  Issuers can still raise interest rates on future card purchases and there is no cap on how high interest rates can go.  Businesses 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 increases.  Credit card companies can also continue to close accounts abruptly, without giving cardholders advance notice.  Many banks are already finding ways around the law and launching new fees not specifically banned by the credit card reform law. 

Another change you'll see, in fact some companies have already started -- if you have a "No Annual Fee" credit card that you pay off every month or use very little, watch for any term changes. They may decide to start charging you a fee. If they do, it might be time to start shopping around.

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President Obama said the law is for “people who found out that credit cards are a one-way street.  It’s easy to get in but almost impossible to get out.”  He warned, however, that the law doesn’t give consumers an easy pass:  “We expect consumers to live within their means and pay what they owe.” 

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