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February 23rd, 2010

What the New Credit Card Rules Mean for You

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The credit card industry is in a constant state of change. The CARD Act, signed by President Obama in May of 2009, is dishing out its new mandates for credit card companies in three phases. Part two went into effect yesterday, February 22, 2010.

Here’s What My Credit Card Said

Last month my credit card company sent me a document that explained the “important information regarding changes to [my] account” that began yesterday.

Due Date: Your payment due date will be the same date each month, and “will be a minimum of 21 days following the close of each billing cycle.”

Minimizing Interest: If you have multiple balances with varying interest, payments “will be applied first to higher interest rate balances and then to lower interest rate balances.”

Overlimit Fee: Similar to the Fed’s rule requiring customers to opt in or out of overdraft protection, “You will not be charged a fee for spending over your credit limit unless you agree to allow us to do so.”

“Penalty APR”: If your APR is increased due to a late payment, the higher rate will be applied to future transactions. “…Your lower rate will be returned for eligible balances if the next six consecutive minimum payments are made on-time.”

Additional Changes

Marketing Restrictions: The marketing of credit cards to college-age consumers will from now on be a lot more restrictive. According to CreditCards.com, “If you’re under 21 and want a credit card in your own name, the law requires you to show proof you can repay the credit card bill yourself or have someone over 21 co-sign on the account.”

Universal Default: Credit card companies are no longer allowed to raise the interest on a credit card based on a customer’s actions with another creditor.

Education and Assistance: Credit card statements will now offer more resources to educate customers. All statements are to now include toll free numbers for at least three non-profit credit counselors, as well as information that warns “consumers of the dangers of making only minimum monthly payments — namely, that it will take longer to repay their debts and cost them more in interest,” writes CreditCards.com.

Fewer Upfront Fees: The CARD Act limits credit card companies from charging fees in excess of 25% of your credit limit during the first year.

Unintended Consequences

We’ve written pretty extensively about the negative/unintended consequences that will come along with this bill. The main concern we had is that good-credit customers — who pay their bills on time and in full every month — will be treated in the same respect as all the rest: subject to the same fees and penalties as those who don’t regularly live up to their obligations, and with higher rates, to boot.

It’s simple: if you take away the credit card companies’ ability to raise rates (and many did so before this portion kicked in), then they’ll simply develop new and “creative” fees that they will charge to all of their customers (emphasis added):

Borrowers with solid credit and a history of paying off their credit card charges on time will be treated exactly the same as those with poor credit and a history of late payments under the new law,” Polina Vlasenko, an institute researcher, wrote in a statement.

[Kenneth J. Clayton, senior vice president and general counsel for card policy for the American Bankers Association trade group] and [Nessa Feddis, vice president and senior counsel for the bankers group], say the law’s interest rate restrictions will translate into higher credit costs for all credit card users.

You’ll see a tick up in interest rates,” Clayton says. “There’s no doubt about that. You will see less access to credit cards to those who have blemishes on their credit records. For those people, you have to either start them off with higher rates or lower balances or both — or not give them a card at all.”

Everybody pays a little bit more in the event that one in the group doesn’t pay,” Feddis says.

Readers: What credit card practices were left out of the CARD Act that you would want to see implemented?

Be sure to check out the Federal Reserve’s consumer guide to credit cards for more information.

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2 Responses to “What the New Credit Card Rules Mean for You”

  1. Mitch Says: February 28th, 2010 at 2:30 pm

    First, the government still messed up by giving these guys way too much time to change the rules before the law kicked into effect.

    Saying that, one of the unique things I noticed on one of my wife’s bills was the area that told how long it would take to pay off the card if she only made a minimum payment. I think that right there will be eye opening to a lot of people, and hopefully will spark them to make better payments when they can.

  2. Tim Manni Says: March 1st, 2010 at 10:50 am

    Hey Mitch,

    I’m so glad you brought that up. I think when people see that new feature (”the area that told how long it would take to pay off the card if [you] only made a minimum payment”) they will be shocked. They should have done that a long time ago.

    Thanks for sharing,
    Tim

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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